Caveat Venditor

"While the information contained herein is not guaranteed, it has been obtained from sources which we consider reliable."

Last week the White House passed a sentence of death on this familiar immunity tag regularly appended in tiny type at the bottom of stock promotion circulars. True to his Party platform. President Roosevelt sent one more special message to Congress in which he said: "I recommend . . . legislation for Federal supervision of traffic in investment securities in interstate commerce. . . . The public in the past has sustained severe losses through practices neither ethical nor honest on the part of many persons and corporations selling securities. Of course, the Federal Government cannot and should not take any action which might be construed as approving or guaranteeing that newly issued securities are sound in the sense that their value will be maintained or that the properties which they represent will earn profit. There is, however, an obligation upon us to insist that every issue of new securities to be sold in interstate commerce shall be accompanied by full publicity and information, and that no essentially important element attending the issue shall be concealed from the buying public. This proposal adds to the ancient rule of caveat emptor ['Let the buyer beware'] the further doctrine: 'Let the seller also beware' [caveat venditor]. It puts the burden of telling the whole truth on the seller. It should give impetus to honest dealing in securities and thereby bring back public confidence."

The bill to compel "full publicity and information" on security issues was the handiwork of Democrat Huston Thompson, onetime chairman of the Federal Trade Commission. It was largely patterned after Britain's Companies Act. Five years in jail and a $5,000 fine awaited the crooked U. S. stock promoter or corporation official who today must be caught by the roundabout charge of "using the mails to defraud." The proposed legislation did not make all stock issues foolproof but it did attempt to divide investment sheep from speculative goats. When House hearings started on the measure during the week, Representatives were shocked to learn from a Department of Commerce expert that of the $50,000,000,000 worth of securities sold in the U. S. in the last 13 years, one-half were "undesirable or worthless."

The Federal Securities Act sets up the following machinery:

1) The Federal Trade Commission is made a registration office for all securities to be sold in interstate commerce. Registration fee: 1/100 of 1% of the value of the issue. Facts to be supplied the Commission under oath by all interested parties include a complete and detailed statement of the issuing company's capitalization, its stock setup, the purpose of the issue, bonuses and commissions to be retained by the underwriters and the amount to be returned to capital investment. To register a foreign government security the U. S. selling syndicate must state the object of the loan, its bonuses and commissions, the general financial condition of the borrowing country and whether or not it has ever defaulted on any of its international obligations and if so, why.

2) A Trade Commission registration can be revoked for fraud, insolvency, dishonest advertising or unsound business principles.

3) Interstate advertisements must contain approximately the same set of facts required for registration and be approved by the Trade Commission. Any material misrepresentation makes the promoters liable to civil damage suits by stock buyers as well as criminal prosecution by the U. S. It is made a crime to convey the idea to any prospective purchaser that Federal registration is tantamount to Federal approval of the worth of the issue.

Security publicity legislation was only the first step in the President's program to bring such dealings under stricter Government supervision. His second step called for a Federal licensing system for all exchanges--a proposal which brought back to Washington Samuel Untermyer, 75, famed New York attorney and longtime advocate of Federal license for stock exchanges.

Pujo Echo. On May 18, 1912, the Democratic House of Representatives authorized its Banking & Currency Committee of which Louisiana's Arsene Paulin Pujo (pronounced pew-joe) was chairman "to investigate banking and currency in the U. S. as a basis for remedial legislation." Two subcommittees were formed--one headed by Virginia's Carter Glass which resulted two years later in the Federal Reserve Act and the other headed by Chairman Pujo which set out after the "Money Trust." Mr. Untermyer was named chief counsel of the Pujo inquiry and proceeded to make sensational headlines for many a month. His two prime witnesses were the late George Fisher Baker and the late John Pierpont Morgan. A cancer of the throat kept the late William Rockefeller, brother of John D. Sr., from testifying. It was Mr. Morgan's one and only appearance before a Congressional committee as a private banker and Counsel Untermyer made the most of it. On the stand Banker Morgan admitted the State had no supervision over him or his institution, that he, Banker Baker and James Stillman (National City Bank) generally worked together in their big deals. Morganisms:

"There is no way in which one man could obtain a money monopoly. . . . Commercial credit is based primarily on character. Money cannot buy it. . . . A man I do not trust could not get money from me on all the bonds in Christendom. . . . I have known men to come into my office and I have given them a check for $1,000,000 when I knew they had not a cent in the world."

Chairman Pujo's investigation proved nothing definite about the "Money Trust" largely because a Republican Comptroller of the Currency, on President Taft's orders, blocked the committee's attempt to get at national bank records. The Press consensus was that a dozen bankers, including Messrs. Morgan, Baker and Stillman, controlled most of the country's commercial credit--a situation impossible today with the country's credit scale expanded from hundreds of millions to tens of billions.

In 1913 Mr. Pujo voluntarily retired from Congress. Today, aged 71, tall, erect and keen-eyed, he is senior partner of Pujo, Bell & Hardin (law) of Lake Charles, La. He watches Congress from afar, keeps his mouth shut on public questions, points to the four-volume record of his investigation in the Library of Congress as his life work.

A parallel exists between the Pujo investigation of 20 years ago and the Senate's current investigation of stock markets and bankers. Though it had no direct connection with the Federal Reserve Act, the "Money Trust" inquiry helped to build up popular sentiment which led to the later passage of that fundamental law. The Senate committee's current disclosures are counted on by President Roosevelt, who personally turns startling evidence on & off for the best public effect, to do the same thing for his banking reform program. Lawyer Untermyer was back in Washington to help draft an Exchange Licensing Act for which he had been working ever since the Pujo investigation.

Last week the possibility developed of Mr. Untermyer's again examining another John Pierpont Morgan on a Congressional witness stand. The Senate committee, now tracking down private bankers preparatory to making public spectacles of them, pondered the idea of making Mr. Untermyer its advisory counsel. Its regular counsel, Ferdinand Pecora, was dispatched to the House of Morgan with a set of questions. Some were answered but on questions relative to capitalization John William Davis, Morgan attorney, raised technical objections as to the Senate's jurisdiction. Mr. Pecora sped back to Washington where the committee promptly prepared a resolution whereunder the Senate would grant it unquestionable power. Mr. Morgan & partners were advised to stand by for a hurry-up call to the Capitol.

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