the water to the actual cash in this investment would gradually diminish. Now, are there not many transactions of that kind conducted by these holding companies, and do they not sometimes even give more than one share of common stock as a stock bonus? Do they not sometimes give two shares, and do they not also sometimes give very large sums to these banks and commercial houses that act as the intermediaries between the promoters of the company and the investors?

Mr. FLEXNER. I think there have been abuses, as the chairman states. The abuse of which the chairman spoke here a moment ago with reference to the interurban could not occur in the State of Illinois to-day or in the State of Indiana. It could not occur anywhere where there is this regulatory and supervisory power of the commission.

Senator CUMMINS. As I remember it, Mr. Flexner, there are but 17 States that have any such power reposed in their commissions and one or two of those States require payment at par. So there is a pretty big territory that is yet unprovided for. Mr. FLEXNER. Yes; I should say so.

Senator POMERENE. Assuming now that there are 17 States such as Senator Cummins refers to and, as you say, one of them is Illinois-and that such a state of affairs as I suggested in my question could not happen in Illinois because of that statute. Now, in view of that statute, what objection can you, as an Illinois citizen, have to this provision in section 12? It is already provided for there. What objection can you have to it now as a Federal statute?

Mr. FLEXNER. Illinois allows its own commission to fix the conditions under which securities shall be issued.

Senator POMERENE. What conditions?

Mr. FLEXNER. All the conditions.

Senator POMERENE. As to the price?
Mr. FLEXNER. Yes.

Senator CUMMINS. That is one of the reasons they went to Delaware. [Laughter.]

Mr. FLEXNER. No; I stated at the outset why this company was incorporated in Delaware; that it could not do the business which it is doing and be organized in a State which, under the law, does not permit one corporation to hold the stock of another.

Senator CUMMINS. They have no such thing in Delaware, have they?

Mr. FLEXNER. No.

Senator CUMMINS. They have not any railroad commission, I believe.

Mr. FLEXNER. No; I think not.

Senator CUMMINS. It is one of the States in which they allow them to run wild.

The CHAIRMAN. Delaware succeeded New Jersey, I believe. I do not know but that it preceded New Jersey.

Mr. FLEXNER. I shall be very glad to answer any further questions the members of the committee may desire to ask me.

The CHAIRMAN. I wanted to ask you whether this question as to the commissions paid the banks, and so forth, for their services in negotiating the sale of securities would not be covered by this allow ance for services?

Mr. FLEXNER. In the draft of the act?

The CHAIRMAN. In the draft of the act you are allowed to issue stock for services. Would not that cover commissions for agents negotiating the securities?

Mr. FLEXNER. I think not. I am inclined to think that the courts would hold the section as drawn as not meeting the objection I have urged against it.

Senator CUMMINS. If the banking company was employed by the corporation that desired to issue the stock, the word "services" would, of course, cover their work. That is what it was put in there for.

Senator POMERENE. That is, you fear that the bank might not be willing to take the stock or securities which they were selling to others?

Senator ROBINSON. That is one of the objects of the bill.

Mr. FLEXNER. I do not know what that means, if the Senator please.

Senator ROBINSON. It might mean this: That if any person performed services for the corporation, the corporation may issue stock in payment therefor, but before it is done the commission must determine the value of the services.

Mr. FLEXNER. Well, if that is what the committee has in mindSenator ROBINSON. That is one of the things. The committee is trying not to take care of the few cases to which that would apply, but of the many cases where personal services of value may be rendered a corporation; but we are also trying to prevent the depletion of the resources of the corporation through means of that kind.

Mr. FLEXNER. If that is what the committee has in mind, I think it would be possible to write the section so as to make it perfectly clear. The CHAIRMAN. Take your corporation. Are you familiar with the commissions that are paid to banks and financial institutions for negotiating the securities?

Mr. FLEXNER. Yes; yes.

The CHAIRMAN. About what do they amount to?

Mr. FLEXNER. From 10 to 15 per cent.

The CHAIRMAN. From 10 to 15 per cent?

Mr. FLEXNER. Yes, sir. It varies.

at 85.

Some of the bonds have sold

The CHAIRMAN. That would be 15 per cent?

Mr. FLEXNER. Yes, sir. It has varied at different times.

The CHAIRMAN. The custom is, I presume, for the banks to take over the bonds at that figure and then negotiate them at their own price in their own time?

Mr. FLEXNER. They sell them at a slight increase; yes.

Senator CUMMINS. They only thing, Mr. Flexner, that is not covered by this bill, to my mind, to which you have referred is this state of facts, or a state of facts similar to it: You offer your stock in your corporations for sale. The person to whom you offer it has some doubt with regard to the earning capacity of your company or the value of its property, and comes to the conclusion that you have only about three-quarters of a chance to earn money enough to pay dividends upon the par value, and therefore he says, "I am willing to pay 75 cents on the dollar for your stock." Now, that is not taken care of in this bill, and I do not think it ought to be taken

care of, because I do not think that an investment of money in a corporation by one who is to become a partner in it, should be made upon any such basis. But, so far as commissions to banks are concerned, while I think myself they ought to be paid by the investor, yet that case taken care of in this bill or intended to be, at any rate. The CHAIRMAN. This bill would not cover a sale of either bonds or stocks to a bank at a discount. It would simply cover an allowance to that bank for selling those bonds and stocks, and there is no limit upon the amount of that commission; the amount of that commission is entirely at the discretion of the interstate trade commission.

Mr. FLEXNER. I confess I did not read that into the section when I read it.

The CHAIRMAN. Let me ask you another question, Mr. Flexner. The shares of corporations that are subscribed for at par do not always stand at par after the enterprises are inaugurated, do they? Mr. FLEXNER. Let me see if I understand your question, Mr. Chair

man.

The CHAIRMAN. I say that the shares of corporations that are issued at par do not always stand at par?

par.

Mr. FLEXNER. Why, no. They are frequently worth more than The CHAIRMAN. They are frequently worth more than par and frequently worth less.

Mr. FLEXNER. Unfortunately, sometimes they are worth less than par.

The CHAIRMAN. Now, then, we will assume that a stock that is subscribed for at par becomes worth only 50 in the market and that corporation wants to put out an extra issue of stock. What has been the custom of the public-utility commissions with which you are familiar that have regulatory powers over these matters, with reference to such increased issues? Have they compelled the issue at par or have they accommodated themselves to the market price of the existing issued stock?

Mr. FLEXNER. The situation put would be impossible to sell stock for the reason that no investor would pay a corporation part of its stock when he could buy it on the market at 50.

The CHAIRMAN. Take a situation where the shares have increased in value the outstanding shares-above par, say to 150. Has it been the custom of these commissioners to compel the issue of the new stock at 150 or at par?

Mr. FLEXNER. Under such circumstances, it is usually the practice to sell the new stock to corporation stockholders at par.

The CHAIRMAN. To its own stockholders.

Mr. FLEXNER. Yes. It is taking care of its business just in that way, giving its own stockholders the benefit of that appreciation in the value of their own securities.

The CHAIRMAN. That is all. Are there any further questions? Senator POMERENE. Just one. It is your observation, is it not, that where a banking house finances one of these large concerns, if it does take bonds or stock as part pay or full pay for its services, it generally disposes of the stock and bonds that it acquires in that way, for that purpose, to the public generally?

Mr. FLEXNER. Oh, yes.

Senator POMERENE. So that, as a matter of fact, they wash their hands of the proposition and let the public hold the bag?

Mr. FLEXNER. No. They buy the securities for the purpose of making a small profit and sell them in the market at a slight in

crease.

Senator POMERENE. Well, this stock that is of uncertain value, and that has been issued at very much below par, or bonds that have been issued in the same way.

Mr. FLEXNER. I have endeavored the best I could to answer this question.

Senator POMERENE. That is all.

Mr. FLEXNER. The situation as we have it in mind, and as I have endeavored to present it, would be met by adding at the end of section 13 of the proposed bill the following, which appears in our brief:

Nor to corporations acquiring or holding the stock of or engaged in the business of conducting a public utility which is subject to State regulation, other than common carriers as defined in the act to regulate commerce, approved February 4, 1887, and the amendments thereto.

In conclusion, I want to thank the committee, and to say that what I have urged here is in line with the actual experience as developed in a great industry. It is, furthermore, sound economically; it leaves to the States a function which they are doing increasingly better, and it is in harmony, as I see it, with what is being urged by publicists, including the President of the United States.

STATEMENT OF STUART G. GIBBONEY, ESQ., REPRESENTING BERTRON, GRISCOM & CO. AND WILLIAM P. BONBRIGHT & CO.

The CHAIRMAN. Will you give your full name and your address and occupation, and whom you appear for?

Mr. GIBBONEY. Stuart G. Gibboney; lawyer; member of the firm of Barber, Watson & Gibboney, practicing at 165 Broadway, New York. I appear here for Bertron, Griscom & Co., of New York, Philadelphia, and Paris, a banking house dealing in public utility holding company securities; and for William P. Bonbright & Co., of New York, a similar banking house dealing in similar securities throughout the country. As I am the principal author of the brief which has been submitted here to the committee, I should like to impress upon the committee the argument set forth in that brief, and make any explanations that the committee may desire as we go along. We ask for the exception of public utility holding companies in this proposed bill for several reasons.

In the first place, the public utility holding company regulated by State commissions has been largely the answer to the demand at one time in this country for municipal ownership and operation. That is particularly true in New York, where we have had our public service statute, which was enacted in 1907 through Mr. Justice Hughes's efforts, then governor of the State. The entire cry for municipal ownership, which then was at its height, has been allayed by the efficient administration of our public service commission. It regulates issues of stocks and bonds; it supervises the control and operation of these corporations, fixes the price at which they furnish

the service to the public, and at the same time exercises its supervising power over the corporation as a whole.

Under our statute in New York an electric lighting company and a gas company are allowed to consolidate or be brought together under one holding company, with the permission of the public-service commission. The State of Texas holds that such companies are competing and does not permit their consolidation. You will find that the States are not uniform in determining whether or not an electric light and a gas company are competing corporations, and therefore any National legislation interfering with State control is dangerous. For the Senate and House to enact a bill which would upset and interfere with the State regulation of these public utilities would, in my opinion, work great harm. In the last 10 years, practically, this Public Utility Holding Co. development has taken place. The figures are astounding. There is over $8,000,000,000 invested in this country now in public utilities, as compared to the $20,000,000 invested in railroads. Of this eight billions, five and onehalf billions is invested in corporations controlled and operated by holding companies. Of the 89,000,000 of people who are served by public-service corporations with gas, electricity, and traction, €2,000,000 of them are served by companies operated by holding companies. So the property interests that this committee is dealing with are very great.

Senator CUMMINS. Let us see about that, Mr. Gibboney. The brief that you filed is a very interesting one, and I have read it. It states very clearly the situation. But two things must combine in order that this bill shall attach to any of these companies. In the first place the companies must be competitive; in the second place they must be doing an interstate business. Now, of the campanies representing these billions of dollars that are invested in the public utility companies of the United States, how many of them will fulfill both of those conditions?

Mr. GIBBONEY. I should say, roughly speaking, 20 per cent of them.

Senator CUMMINS. Give us an instance,

Mr. GIBBONEY. I will give you the Appalachian Power Co. That is a company which I in no way represent and am not interested in. The Appalachian Power Co. is a company which dams up the New River in Wythe County, Va. It is a holding company, which carries its electricity through a number of towns into West Virginia, where that electricity is disposed of to towns, mines, and other industries there.

Senator CUMMINS. Stop right there for a moment, if you please. Mr. GIBBONEY. Yes, sir.

Senator CUMMINS. The Appalachian company, we shall assume, is engaged in interstate commerce. It furnishes power or light to the various communities through which its lines are carried?

Mr. GIBBONEY. It does.

Senator CUMMINS. And we will assume that it holds the stock of the local companies that are organized for that purpose.

Mr. GIBBONEY. Yes, sir.

Senator CUMMINS. But the local companies which are organized for that purpose are not competitive companies?

Mr. GIBBONEY. They might be.