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October 14, 1953

MORGAN et al. [Part 2 of 2]



The Offense as Charged in the Complaint.

 Certain Alleged Unifying Elements

 Abandoned or Disproved.

 The Applicable Law Relative to Conspiracy.


 The Investment Banking Business.

 I. Prior to the First World War.

 II. Between World War I and the Securities Act of 1933.

 III. Further Developments 1933-1949.

 IV. How the Investment Banker Functions.


 The Seventeen Defendant Investment Banking Firms.

 1. Morgan Stanley & Co.

 2. Kuhn Loeb & Co.

 3. Smith Barney & Co.

 4. Lehman Brothers.

 5. Glore Forgan & Co.

 6. Kidder Peabody & Co.

 7. Goldman Sachs & Co.

 8. White Weld & Co.

 9. Eastman Dillon & Co.

 10. Drexel & Co.

 11. The First Boston Corporation

 12. Dillon Read & Co. Inc.

 13. Blyth & Co., Inc.

 14. Harriman Ripley & Co., Incorporated.

 15. Stone & Webster Securities Corporation.

 16. Harris Hall & Company (Incorporated).

 17. Union Securities Corporation


 The Syndicate System.

 I. Did the Seventeen Defendant Investment Banking Firms Use the Syndicate System as a Conspiratorial Device in Connection with Any Integrated Over-all Combination?

 II. Alternate Claims Belatedly Attempted to Be Asserted against the Investment Banking Industry as a Whole.

 A. The Rule of Reason. B. The Securities Act of 1933, the Securities

 Exchange Act of 1934, and the Amendments Thereto; the Rules, Interpretations and Releases of the SEC Thereunder; and the Organization and Functioning of the NASD.

 C. The Opinion of the SEC in the Public Service

 Company of Indiana Case.

 Some Interim Observations.


 Did the Seventeen Defendant Investment Banking Firms Combine for the Purpose of Dominating and Controlling and Did They in Fact Dominate and Control the Financial Affairs of Issuers by Directorships and Solicitation of Proxies?


 Burlington Mills.

 Jewel Tea.

 The Evidence Generally Applicable to Directorships Discloses No Conspiratorial Pattern but Rather the Contrary.

 First Boston.

 Addinsell and Phillips Petroleum.

 Harriman Ripley.

 United Air Lines.

 Union Securities.

 Directorship Evidence against Goldman Sachs, Lehman Brothers, Kuhn Loeb, Dillon Read and Blyth.

 Goldman Sachs.

 Lehman Brothers.

 Cluett Peabody.

 Food Fair.

 Allied Stores.

 Aviation Corporation.

 Sears Roebuck.

 Cleveland Cliffs Iron Co.

 Kuhn Loeb.

 Franklin Simon.


 Dillon Read.

 National Cash Register.

 Amerada Petroleum.

 Outlet Company.

 Beneficial Industrial Loan.

 Union Oil.

 Commercial Investment Trust.




 Pan American Airways.

 Anaconda Copper.

 Iron Fireman.

 Some Further Interim Observations.


 The 'Triple Concept'. Semantics. 'Historical Position'. Chicago Union Station. The Alleged 'Practice' of 'Traditional Banker' and 'Successorships'.

 1. Morgan Stanley.

 The 'Master Mind'. The Telephone Business. Consumers Power. The Alleged 'Caretaker' Situations. Dayton Power & Light. Atlantic Coast Line, Toledo & Ohio Central, Chicago &

 Western Indiana, Nypano (New York, Pennsylvania & Ohio) and Dominion of Canada.

 2. Kuhn Loeb.

 The Otto H. Kahn 'Show Window'. Bulgaria. Commonwealth of Australia. Armstrong Cork. Bethlehem Steel. R. H. Macy & Co. Crucible Steel. General Cable.

 3. Smith Barney (Edward B. Smith & Co.).

 What Is Now Taking Shape Is Not a Static 'Mosaic' of

 Conspiracy but a Constantly Changing Panorama of Competition Among the Seventeen Defendant Firms.

 Wilson & Co. Rochester Gas & Electric. A. E. Staley Manufacturing Co. Aluminum Koppers, Jones & Laughlin, Lone Star Gas, Gulf


 Southern Pacific. Standard Oil of New Jersey.

 4. Lehman Brothers.

 Crown Zellerbach. Giannini Interests. The So-Called 'Treaties' Between Lehman Brothers and

 Goldman Sachs.

  National Dairy Products. Butler Bros., Associated Gas & Electric, Indianapolis

  Power & Light and Tidewater Associated Oil.

  5. Glore Forgan.

  Indianapolis Power & Light.

  6. Kidder Peabody.

  Pennsylvania Power & Light.

  7. Goldman Sachs.


  8. White Weld.

  9. Eastman Dillon.

  10. Drexel.

  11. First Boston.

  Province of Cordoba, Androscoggin Electric Corp., and

  Central Maine Power.

  12. Dillon Read.

  Scovill Manufacturing Co., Scripps, Porto Rican American

  Tobacco Co., Argentine Government, American Radiator and Grand Trunk Western.

  United Drug. Shell Union Oil.

  13. Blyth.

  Pacific Gas & Electric. Competition for Leadership 1934-1936. The Alleged Overly-Large Syndicate Formed By Blyth in

  Connection with the $ 80,000,000 Issue of March 27, 1945.

  The Sale in 1945 of 700,000 Shares of Common Stock of

  Pacific Gas & Electric Held by North American.

  14. Harriman Ripley.

  Scandinavian Financings.

  15, 16 and 17. Stone & Webster, Harris Hall and Union Securities.


  Alleged Conspiratorial Opposition of the Seventeen Defendant Banking Firms to 'Shopping Around,' and to the Campaign for Compulsory Public Sealed Bidding; and the Alleged Adoption of Devices to Sabotage SEC Rule U-50 and Compulsory Public Sealed Bidding in General.

  General Views on Competitive Bidding and the Advantages to Issuers Arising Out of Continuing Banker Relationships.

  The Eaton -- Young -- Halsey Stuart Campaign.

  Responses to Requests from SEC to Express Views Relative to Proposed Rule U-20 and Further Amendments to Rule U-12F-2.

  Alleged Overly-Large Syndicates and Other 'Devices' to Sabotage Public Sealed Bidding.


  The 'Insurance Agreement,' Alleged to Have Been Made on December 5, 1941, and 'Approved' on May 5, 1942.



  Administrative Features and Statistics of the Trial

  Summary, Rulings on Motions and Dismissal.


  Summary Description of Statistical Compilations, Tables and Charts.


  The "Triple Concept"

  The definition of "traditional banker" contained in paragraph 22(II) of the complaint will be hereinafter referred to. The "triple concept" is alleged in paragraphs 44 and 45. Thus, omitting the references in subdivisions A(1) and (5) which relate to the syndicate system, discussed in PART III of this opinion, paragraph 44(A) of the complaint as amended alleges as follows:

  "44. The conspiracy has consisted of a continuing agreement and concert of action among the defendants, the substantial terms of which have been that defendants:

  "A. Agree not to compete among themselves for and in the merchandising of security issues, and to divide among themselves, on a mutually satisfactory basis, the merchandising of the security issues botained by each of the defendant banking firms from issuers, among other means --

  * * * * * *

  "(2) By recognizing and deferring to the claims of the defendant traditional bankers to manage and co-manage and control the merchandising of the securities of particular issuers.

  "(3) By determining their respective participations and positions in buying groups in accordance with the concept of historical position.

  "(4) By reciprocally exchanging participations in the buying groups which they manage.

  * * *."

  The reference to the same subject in paragraph 45 as amended is as follows:

  "45. During the period of time covered by this complaint, and for the purpose of forming and effectuating the conspiracy, the defendants, by agreement and concert of action, have done the things they agreed to do as hereinabove alleged, and, among others, the following acts and things:

  "A. Defendants formulated and adopted, subsequently operated, and now operate pursuant to, among others, the following restrictive customs and practices:

  "(1) Whenever an issuer agrees to permit one of the defendant banking firms to manage the merchandising of a security issue, the other defendant banking firms recognize this as establishing a continuing banker-client relationship and recognize such firm as the traditional banker for the issuer, exclusively entitled to act thereafter for the issuer in merchandising its future security issues. A defendant traditional banker's recognized exclusive relationships in this respect continue indefinitely and, upon dissolution or reorganization of an investment banking firm acting as traditional banker, the other defendant banking firms agree as to which defendant banking firm or firms, if any, they will thereafter recognize as the successor or successors to the previously recognized relationships of such firm as traditional banker. When one of the defendant banking firms is the traditional banker for an issuer, none of the other defendants will discuss or undertake the merchandising of new security issues for that issuer. Defendant banking firms observe an ethic not to compete and refuse to 'poach on each other's preserves.'

  * * * * * *

  "(3) Defendant banking firms, in forming buying groups, select on a reciprocal basis, other defendant banking firms as underwriters. Over a period of time, the amount of gross spreads which one of such firms enables another to earn by selecting it for participation in buying groups is substantially equivalent (with due allowance for differentials in prestige and underwriting strength) to the amount of gross spreads it has earned in the same period of time, as a participant in buying groups formed and managed by such other firm.Each defendant banking firm keeps a reciprocity record to show the business it has given to each of the other defendant banking firms and the business it has received from each of such firms.

  "(4) Defendant banking firms claim and accord to each other a continuing right to participate in the merchandising of all of the security issues of a particular issuer by respectively demanding and receiving from each other recognition of their historical position with respect to such issues. Once a defendant banking firm has been selected as an underwriter in a buying group formed to merchandise a security issue, it is recognized by the other defendant banking firms as having certain proprietary rights or historical position and is granted an opportunity to participate in every buying group thereafter formed to merchandise future security issues of the same issuer, and the extent of the participation and group position offered to such firm is usually the same. The historical position of an investment banking firm devolves through 'inheritance' upon the defendant banking firm or firms agreed upon by defendants as successor or successors of such firm.

  "(5) The defendant banking firms employ their traditional banker and historical position concepts as devices to exclude other investment bankers from participation in the buying and selling groups they form and manage. Whenever such exclusion is not possible or practical, they avoid, or attempt to avoid, competition by inducing possible competitors to join with them in their buying groups."

  Plaintiff wholly failed to prove the "reciprocity" part of the "triple concept" as appears in the introductory part of this opinion under the sub-title, Certain Alleged Unifying Elements Abandoned or Disproved, which precedes Part I. *fn1"


  It must now be plain that a goodly portion of the time spent in formulating the complaint, and preparing for the presentation of the government's case at the trial, was devoted to semantics. There is a certain amount of this in every case; and the subject need not long detain us. Here we need only briefly comment on the subject by way of background to the discussion of the "triple concept" and "successorships."

  Counsel for certain of the defendant firms assert that some of the fundamental misconceptions of counsel for the government, relative to the simple ABCs of the investment banking business, arose from an overly-persistent reading of the TNEC proceedings, where, it is claimed, those who conducted the proceedings sought to put into the mouths of the investment-banker witnesses, words carefully selected for this "dynamic power," seemingly innocent enough on their face, but having a hidden, but nevertheless very real, opprobrious meaning, detrimental to the interests of investment bankers. From an examination of the various extracts from testimony given in the TNEc proceedings by witnesses connected with defendant firms and others, I cannot find this charge substantiated, although the ex parte character of the investigation and the absence of any opportunity given to the investment bankers to state their side of the case, together with what often seems to me to be an unfair sort of questioning of the witnesses, give me the impression that the TNEC proceedings can scarcely be considered as a repository of uniformly dependable information on the subject of what investment bankers did generally in the 30s and prior thereto. This view is supported, at least to some extent, by the absence of any conclusions or recommendations on the subject of investment banking in the TNEC Report, and the similar absence of any reference to investment banking in any of the 43 monographs published by the TNEC. *fn2"

  That the draftsmen of the complaint, and government counsel in the pretrial proceedings, and during the trial, persistently used words of the character above described in their references to various acts and transactions of the several, separate defendant firms, is too clear for reasonable debate. It cannot fairly be said that there was any general currency among investment bankers, defendant or non-defendant, of such words or phrases as: "caretaker" accounts, "infiltration" of boards of directors, "red flag," "signpost" or "reciprocity." True it is that the words "reciprocity" or "reciprocal" appear two or three times, but that tis without significance; and the others are mere characterizations of counsel, which are repeated so often, sometimes in questions put to witnesses giving testimony on deposition, and sometimes in argument or colloquy, that, unless one is watchful, it is easy to get the impression that the defendants, or some of them, brought these words into the case.

  On the other hand, some of the words, such as "regular banker," "historical position," "inheritance," "successor," "predecessor" and "satisfactory relationship" do appear in documents or in testimony of such a character that the words cannot be considered as having been suggested by counsel for the government. One of the questions in the case, which can only be resolved after a careful consideration of the evidence as a whole, has to do with the frequency with which such words are used, and by whom, and with what meaning. It must constantly be borne in mind that the essence of the charge is the alleged combination, conspiracy and joint action of the seventeen defendant firms.

  It is alleged in the complaint that "traditional banker" is "the term used by defendant banking firms to describe an investment banker who has managed and participated in one or more syndicates to purchase the security issues of a particular issuer on a negotiated basis." I find against the government on this. None of the very numerous documents emanating from the files of one or another of the defendant firms contains this phrase. While Joseph H. King of Union Securities and Henry L. Bogert of Eastman Dillon gave some testimony on deposition to the effect that they had heard the term used, I am inclined to give more weight to the testimony of Harold Stanley on the point, in view of the state of the documents. If, after examining hundreds of thousands of miscellaneous documents in the files of defendant firms, and of issuers, many of them of the most intimate and confidential character, not a single document containing this term could be unearthed, this is strong corroboration of Stanley's statement that he first heard the term during the TNEC proceedings in 1939 and 1940. It has been bandied about to such an extent since then that a certain amount of confusion on the subject is not to be wondered at.

  When I inquired about the references to "satisfactory relationship" in connection with the "triple concept," I was told by government counsel that "satisfactory relationship" and "traditional banker" meant the same thing. As I pondered on all this, after it had been explained by government counsel that "successors" and "predecessors" as alleged did not mean real successorship but were all part of a species of conspiratorial lingo, I had a vague notion that plaintiff's theory was that "satisfactory relationship" was some sort of double-talk claimed to be used by "the defendants" for "traditional banker," and that this was equally true of the "negotiation" of a price for a security issue, the description by investment bankers of themselves as "experts" and the issuers as "clients," and of the references in the depositions by various investment bankers connected with some of the defendant firms to the investment banking business as having "professional characteristics." So also, selecting as a basis for the assertion a word used by Harold L. Stuart in his testimony before the ICC, the description in depositions by these witnesses of the extensive work done by investment bakers in formulating plans, shaping up issues and discussing financial matters with issuers, is referred to by government counsel as "bunk." Quotation marks placed around many of the words in government briefs filed during the first year or so of the trial, when viewed in retrospect, strongly support the view that government counsel claimed that "the defendants" used words with hidden meanings. But the multiplicity of the issues and the general confusion prevented me from understanding the matter sufficiently to insist upon some clarification by counsel for the government. At last, during the connecting statements by government counsel, at the close of the taking of the government's proofs in support of its charge, I began to see clearly that what had been insinuated from the beginning was that these seventeen defendant firms were in every sense of the word conspirators, consciously engaged in an illegal undertaking, and that they had ingeniously devised a language all their own to conceal their operations, just as counterfeiter or bootleggers might use a sort of canting speech. From this point of view, talk about "satisfactory relationships" would be a cover-up for "traditional bankers," "negotiation" of a price for an offering of securities would mean a price forced upon a issuer under the control and domination of the "traditional banker," references to "inheritance" and "successors" and "predecessors" would mean, to the initiates, the foisting upon an issuer of an investment banking firm which had been selected by the co-conspirators to take over the conspiratorial "rights" of some banking house, and member of the conspiracy, which had been forced by the Glass-Steagall Act to give up investment banking; and every time one of the coconspirators in testimony or in a document mentioned a sense of responsibility to the public, or a duty to be "fair" to investors, or referred to "ethics" or "professional characteristics" of the business, or indicated any disposition to do other than selfishly feather his own nest, this was deceitful talk, a sort of special language agreed upon and designed by the co-conspirators to cover up this real purpose, which was to surround the entire operations of the investment banking industry with a series of unlawful restraints, and monopolize "the cream of the business" for themselves.

  At the close of the evidence such charges seemed extravagant, and the then chief trial counsel for the government, whose understanding of the early proceedings was naturally limited, as he first came into the case in the fall of 1952, vigorously denied that such insinuations had ever been intended. But they may again rear their ugly heads; and it is well to have everything out in the open.

  This brings me to one of the most remarkable and one of the most significant shifts of theory made by counsel for the government. The "traditional banker" allegations of the complaint are clear and unambiguous. When one of the defendant firms managed an issue of securities for an issuer, it was charged that he thus became the "traditional banker," and that "the other defendant banking firms recognize this as establishing a continuous banker-client relationship and recognize such firm as the traditional banker for the issuer, exclusively entitled to act thereafter for the issuer in merchandising its future security issues." This made sense in a practical, work-a-day world of profit-seeking business men; it was workable, assuming the "payoff," by the practices of "historical position" and "reciprocity," all of which are also alleged in the complaint, as we have already observed. It made sense vis-a-vis the Sherman Act, too, because it was patently artificial and could not reasonably be accounted for as a normal and to-be-anticipated result of the ebb and flow of natural, unrestrained competitive effort. All a member of the conspiracy would be required to do would be to consult one of the standard security manuals, see which, if any, member of the seventeen alleged conspiratorial firms, or other alleged co-conspirator, had managed the last issue of the issuer under consideration, and he would then know that he was supposed not to compete for the business of that issuer, but rather to defer to his co-conspirator, who thus clearly appeared to be the "traditional banker." It is also clear from the allegations of the complaint quoted in the preliminary portion of this part of the opinion, that the "triple concept" only applied as between the seventeen defendant firms and to other firms who had joined the combination and conspiracy and who were referred to throughout the trial by government counsel as "co-conspirators." It would not matter whether or not the relationship between the issuer and the "traditional banker" was "satisfactory," or slightly impaired or wholly bad. Even if the relationship was so bad as to be practically non-existent, one would be forced to infer from the allegations of the complaint that no member of the conspiracy could compete for the business previously done by the "traditional banker," without some new agreement among the co-conspirators, such as the obtaining of "clearance" or "permission" from the "traditional banker."

  This "concept" of "traditional banker" was so thoroughly demolished during the trial that counsel for the government, during the connecting statements at the close of the government's case, virtually abandoned the theory of the complaint and urged upon me a new and quite different theory, described as "this lesser charge," claimed in some way to be included in the "greater" one alleged in the complaint. This "lesser charge" was that there was a "code" among the co-conspirators according to the terms of which the "traditional banker" was the one who had brought out the last issue, providing his relationship with the issuer was still "satisfactory." Sometimes this is referred to merely as an "ethic" to the effect that members of the conspiracy "will not interfere with satisfactory relationships, so long as they remain satisfactory," without reference to the leadership of the last security issue of the issuer; and there are numerous references by government counsel to alleged refusals by defendant firms to interfere with "satisfactory relationships" where the defendant firms claimed to have the "satisfactory relationships" had not managed the last prior security issue. These twists and turns are very confusing and they led to much argument which need not be summarized. That they indicate some fundamental weakness in the central theme of the government's case seems probable.

  But I cannot enter upon a discussion of the evidence relating to the "triple concept" without first pausing to appraise the effect of this fundamental change of theory. In the first place it dilutes the charge to such an extent as to make it almost impossible to conceive of the existence of any such conspiracy. How is one to know with any degree of certainty whether in a given situation the relationship between the issuer and the investment banker who brought out the last issue has continued to be "satisfactory"? Then, too, there are so many different degrees of "satisfactory selationships" that, on the same set of facts one person might infer that the relationship was "satisfactory," and another might reach the opposite conclusion.No standard is even suggested. Moreover, the plaintiff has the burden of proof, and it would seem that the very least the law should require by way of evidence to support this "leasser charge," is proof by plaintiff, in respect to a given issuer, that the relationship between the issuer and the investment banker who brought out the last issue has or has not continued to be "satisfactory," as government counsel endeavor to demonstrate that there is a deferral to the "traditional banker" on the one hand, or endeavor to explain competition by one of defendant firms, on the other. Surely there can be no presumption on a subject such as this, especially where the initial "satisfactory relationship" is proved by nothing more than evidence that the alleged "traditional banker" managed the last issue.

  Then, too, proof of the operation of the conspiratorial scheme as alleged in the complaint would disclose a pattern of behavior far removed from anything which could be considered as due to normal, ordinary business judgment, whereas evidence supporting the new and "lesser charge" might to little more than show that investment bankers, like people in other lines of business, only go after business that they have some reasonable expectation of securing, which is pretty close to the exercise of normal and ordinary business judgment.

  It is difficult to put out of one's mind the thought that this "lesser charge" is nothing more than a maneuver to cover up the lack of evidence to support the charge as formulated in the complaint. Anyone can see that, if the relationship between an issuer and an investment banking house is such that the investment banking house has brought out a long and continuous series of issues, and goes back uninterruptedly for many years, as in some of the instances already described in this opinion, it would be a mere waste of time for another investment banking house to formulate elaborate plans for future financing and other wise do the things necessary to be done, in order seriously to compete for the business of that issuer. It is little wonder that, under such circumstances, many of the witnesses who testified on deposition said that they would not go after such business, they would not waste their time. After all, as testified by Harold L. Stuart, there is no point in doing this sort of thing unless "invited" to do so by the issuer, who generally resents the ringing-door-bell type of approach.

  If what is complained of is merely that, as a result of successful competitive effort, the seventeen defendant firms have too large a slice of the business, "more than their fair share" as it were, whatever that may mean, then the avenue of approach would seem to be to the Congress for new legislation on the subject, as was done in the case of public utility holding companies, prior to the passage of the Public Utility Holding Company Act of 1935.

  In the view of government counel, this new maneuver provides a solution for all their difficulties. Thus, without calling a witness to describe the negotiations or the attendant circumstances or anything else, government counsel would place the defendants in the following dilemma. If the documents or deposition evidence show competition by one or more of the defendant firms for the business of an issuer whose last security issue was managed by another defendant firm, this shows that the relationship of that firm with the issuer could not have been "satisfactory," especially if the competing defendant firm suceeds in getting the management or co-management of the next issue. On the other hand, if the defendant firms do not compete for the business, then they are "deferring" to the "traditional banker." It is difficult to take this seriously.

  Furthermore, how is the new theory about "satisfactory relationships" to fit into the allegations of the complaint as amended with reference to "predecessors" and "successors"? At the beginning I was told that the conspirators parcelled out among themselves by agreement the conspiratorial "rights" possessed by the various banking institutions who were members of the conspiracy, but who had to drop out on June 16, 1934, when the Glass-Steagall Act took effect. How is one to "inherit" a "satisfactory relationship," which must necessarily be of a personal character, as between specific individuals or groups of individuals? Moreover, a "relationship" is a two-way street; it would not be practicable for investment bankers to agree among themselves as to which one as "successor" would have at any time an "existing satisfactory relationship" with an issuer, unless the latter is also a party to the scheme, which is not claimed.

  But let us for the moment lay aside these shifts of theory and examine in detail plaintiff's specific contentions as made at the close of the evidence, and the state of the proofs relative thereto.

  At various parts of this large record are to be found very numerous instances of competition by each and every one of the principal defenant firms, and by the others as well, which are contradictory of the existence and operation of the alleged "triple concept." Only an opinion of inordinate length and prolixity could cover even a sampling of this competition, which, in view of the many issuer situations which are the subject of extended comment herein, seems unnecessary. General findings relative to such competition by the several defendant firms may be submitted in due course. The evidence pertaining to the "traditional banker" part of the case, however, which we are about to discuss, must be evaluated against the extensive background of the competition just referred to.

  The inferences to be drawn from the words and phrases emphasized by government counsel depend in no small measure, as government counsel have contended from the beginning, upon the state of the proofs as a whole. We shall find that the fatal, underlying defect in the approach by government counsel, which affects each of the principal factual supports of the theory of an integrated, over-all combination and conspiracy as alleged, is the misconception of the facts relative to the functioning of the entire investment banking industry, which has already been pointed out. Just as the operation of the syndicate system of today is the result of many decades of gradual, functional growth and development, so also will it be found that the habits and preferences of issuers and the whole pattern of competitive behavior of these seventeen defendant firms and other investment bankers as well, such as Halsey Stuart, are likewise the result of a similar gradual, functional growth and development. At the very heart of the case lies the fundamental principle which is implicit in every antitrust case, and which government counsel have never disputed, that the Sherman Act was not designed to compel businessmen in any industry to compete in any particular way, but rather to break up and dissolve monopolistic or restraining combinations, conspiracies or agreements not to compete.

  "Historical Position"

  After some vacillation on the subject on the part of government counsel, it is now agreed by all that the "reciprocity" and "historical position" parts of the "triple concept," even if proved, would not in themselves give any offense to the Sherman Act. In other words, if the proof fails as to the "traditional banker" feature of the "triple concept," the others have no significance.

  The evidence concerning "historical position" puzzled me for a long time, and the situation was not cleared up until after I heard the testimony of Harold L. Stuart. The competition for participations in the various underwritings, and to some extent even for positions in the selling groups, is intense, as many of the investment banking houses have large selling organizations and they need a constant and substantial amount of securities to sell. The documents are full of such words as "claims" and "rights," sometimes based upon work done in the past in connection with the distribution of the securities of a particular issuer, but more generally based upon the underwriting position of the claimant in the last or some previous security issue by the same issuer. There is a good deal of dissatisfaction with the participations which are finally allotted, and practically every investment banker seems always to be using various arguments to get a better position than before, or at least a position which is no worse than before.

  At first blush one would suppose that the assertion of a "claim" or "right" to a certain position, based on the records of the prior issues, would indicate some sort of understanding or agreement. But this seemed hardly consistent with the fact that an investment banker who had at any time in the past participated in the underwriting of an issue of the particular issuer, seemed to have the "right" to make the "claim," no matter how long ago he had thus participated and wholly irrespective of the fact that there had been numerous intervening issues in which he had not participated at all. If they all made "claims" there would not be enough participations to satisfy the "claims." While there might be some "declinations," one could never be certain of that. Moreover, such "claims" were asserted by defendant and non-defendant firms alike.

  Several partners or officers of some of the defendant firms had testified on deposition that the references in the documents to "claims" or "rights" were really in the nature of arguments supporting the requests for participations, and that these were "considered," together with all available relevant data affecting distributing ability and underwriting strength, and a decision made strictly on the merits.I was skeptical about this before I heard Stuart's testimony.

  I questioned Stuart on the subject and found that the fact was as some representatives of defendant firms had already testified on deposition; and a further study of the documents shows that this testimony is thoroughly in accord with the general tenor of the documents which, more often than not, set forth arguments which go to the merits in support of their "claim." Moreover, "claims" based on "historical position" are made throughout the industry as a whole, and not by any single group, such as the seventeen investment banking houses made defendants in this case.

  The upshot of the matter is that a participant in prior issues has already had experience in the distribution of the securities of that particular issuer and thus must know a good deal about the company and the type of investor, individual or institutional, who would be in the market for securities of this character; and the very fact of prior participation as an underwriter is some indication of sufficient underwriting strength to support the risk involved. Accordingly, it would not be fair to deny him a reasonable hearing on his application for a participating position similar to or better than the one he had before. Hence, in the patter of the trade, he is said to have a "right" to present his "claim." Stuart waxed quite eloquent on the subject, using such expressions as "moral right" and "decent commercial ethics." But, as I had already been informed by the others, the catch is that neither the manager nor the issuer to whom these "claims" are not infrequently addressed, is under any obligation to honor the claim.All that is required is that the "claim" be "given consideration," which means a consideration of the whole picture on the merits, including present underwriting strength, past performance, improvement or deterioration in distribution facilities and so on. Stuart evidently considers it morally wrong to exclude a participant who has been doing "a good job." There is nothing conspiratorial about this; and I find no discrimination against non-defendant firms, despite the considerable number of letters written by a few of the defendants to non-defendant firms, which give as an excuse for not granting or recommending participations the fact that there are "obligations" to firms who participated in the last issue, or too many "historical" claims, or that the list could not be extended beyond "those underwriters who participated in the various past issues." These letters are mere "polite refusals," calculated to give the least offense to the applicant.Occasionally a document will indicate some selfish reason for including a particular firm as a participant, without too much regard for the merits; but this is true of a very few defendant firms, and has little significance.

  While these "historical position" requests are described in the complaint as "proprietary rights" and are alleged to be "usually" granted, counsel for the government conceded that the most the plaintiff's evidence showed was that they were "frequently" allowed. There is no substantial evidence to sustain the definition of "historical position" in the complaint as a "term used by defendant banking firms to describe the recognized claim of an underwriter to continue to participate in future syndicates to merchandise security issues of the same issuer."

  At times the positions of the underwriters in successive issues of a particular issuer were the same, or more or less so; more often they were not. Moreover, new underwriters were often added to the syndicate which was being formed to underwrite the next security issue, and underwriters who had been participants in the syndicate which had underwritten the previous issue were frequently eliminated. And there is abundant proof that issuers had the final say, and that in many cases the issuers gave directions and made suggestions relative to including this or excluding that investment banking firm from the list of participants, or changing their positions up or down, as we have already had occasion to observe.While it is difficult to generalize on the subject, however, it seems to me that the issuers more or less left it to the manager to make up the group, as the manager would be in a better position to know who should be included.

  In instances too numerous for detailed discussion, both defendant and non-defendant firms were denied a participation in a forthcoming issue, despite "claims" asserted on the basis of "historical position"; and even the "polite refusals" are inconsistent to some extent with the theory of over-all conspiracy, as in most such cases, although the letters would indicate that the firm sending the letters was more or less bound by the "historical positions" of the participants in the last issue, it is established by the static data that the underwriting groups being made up, or having already been constituted at the time the letters were sent, included non-defendant firms who had not participated as underwriters in the previous issue of the same issuer.

  That all managerial houses give some consideration to the positions and percentages of the participating underwriters in past issues of the same issuer seems not in substantial dispute. Otherwise, I do not see how they could make up the underwriting groups without lost motion, and considerable waste of time collecting data, which is necessarily reflected in the past positions and percentages.

  Chicago Union Station

  There were twelve security issues of Chicago Union Station in the period beginning February 8, 1916, and ending March 15, 1940. Counsel for the government continually refer to this as a "frozen" account, and the static data and a long series of documents in evidence are claimed by government counsel to give some support to the "traditional banker," "historical position," "successorship," and opposition to the campaign for compulsory public sealed bidding phases of plaintiff's charge. Accordingly, it will be convenient to discuss the whole matter here. I may say, at the outset, that, as will presently appear, the evidence relative to the Chicago Union Station does not fit into any of the government claims above referred to.

  In 1912 Kuhn Loeb and Lee Higginson fomed a nucleus group to "try to get the Chicago Terminal business"; and they agreed that each would undertake responsibility for carrying 50% of any such purchase, whether alone or with associates. Kuhn Loeb invited National City Bank and Clark Dodge to be associated with it on original terms for any financing which might eventuate, and Lee Higginson invited J. P. Morgan & Co., First National Bank of New York and Illinois Trust & Savings Bank.On this basis the group purchased and offered $30,000,000 of 4 1/2% Series A bonds on February 18, 1916. The purchase group consisted of all except J. P. Morgan & Co. and Clark Dodge, and these two, although participants on original terms, did not enter into the purchase contract with the issuer.

  In the remainder of the pre-Securities Act period substantially this same group purchased six additional issues and the seven issues together make up what is called the "frozen account," because the percentage interests, except for the elimination of Clark Dodge at the time of the purchase of the 1921 issue, remained about the same.

  As this was a purchase on original terms and is of a character quite different from the other issues generally involved in the case, there would seem to be no room for the application of the "triple concept," especially as six of the seven issues were brought out under the same $60,000,000 mortgage executed in 1915. There seems to be no illegality connected with the formation of this group nor anything to indicate that it was an overly large one or that the underwriting strength of the members of the group was such as to constitute any illegal restraint. Perhaps, if witnesses had been called and all the relevant details fully disclosed, there might have been some basis for a ruling that the specific arrangement violated the Sherman Act.But no such issue is presented in this case, no witnesses were called to testify on the subject, and government counsel made it plain that they desired no such ruling.

  An incident connected with the $850,000 issue of 1924 is stressed by counsel for the government but seems to merit no extended discussion. $7,000,000 of the Series B bonds had been sold subject to ICC approval, and, in March 1924, the ICC gave its approval, but, relative to the $850,000 of Series A bonds, directed that they "be sold to the highest bidder after public advertisement for competitive bids." No bids were received.Halsey Stuart did not bid, although there was no reason why the firm should not have observed the usual public announcement of the decision of the ICC; nor is there anything to indicate that the lack of bids was in any manner due to any activity on the part of any of the defendant firms. The suggestion that members of the purchase group "controlled" the issuer seems gratuitous, and is unsupported by evidence.The proprietary roads were the Chicago, Burlington & Quincy, the Chicago, Milwaukee & St. Paul, the Pittsburgh, Cincinnati, Chicago & St. Louis and the Pennsylvania, each of which guaranteed the Station's bonds pursuant to an operating agreement executed in 1915, and supplemented in 1919.

  The remaining five issues all came out in the post-Securities Act period.Only two of the original group remained in the investment banking business -- Kuhn Loeb and Lee Higginson. The answer to the claims of government counsel is to be found in the conduct of these two leaders or managers of the two 50% interests above referred to. Kuhn Loeb took in Harriman Ripley, which was no more than natural as Pierpont V. Davis of the then Brown Harriman had represented the National City Bank in the negotiations for the 1924 issue, and was highly regarded by the issuer and the representative of the Pennsylvania.This does not seem to me to be any recognition of "successorship."

  The Lee Higginson side of the picture is complicated by the fact that First National and Continental Illinois evidently thought that there might be legislation to permit them to return to the investment banking business, and Lee Higginson, whose former position of eminence in the investment banking industry appears to have suffered some diminution in prestige, appears to have made a deliberate effort to please its three former associates, First National, J. P. Morgan & Co. and Continental Illinois. J. P. Morgan & Co. declined to make any suggestions. Lee Higginson then invited First Boston to join the group with a 5% interest, which was accepted. Charles Glore of Field Glore was a director of the Burlington and he made strenuous efforts to have his firm included; but the Continental Illinois completely ignored any question of the claimed "interests" and recommended Field Glore to Kuhn Loeb rather than to Lee Higginson. Just how Field Glore got in is far from clear, and it may well have been with some assistance from the executive officers of the Pennsylvania, through the intervention of Budd, president of the Burlington. One of the letters of Jessup of Lee Higginson indicates also that Sturgis, of the First National Bank of New York, was aware of the very persistent efforts of Field Glore to get some sort of a position in the business. That Charles F. Glore, the head of the firm, tried every angle of approach is plain; and it was natural that he should do so, as Field Glore was a Chicago house and this was an important piece of financing in the Chicago area.

  The First National seemed quite sanguine about the prospects of a change in the law, and wrote to Lee Higginson "We would like to nominate E. B. Smith & Company to receive 1/2, Lazard Freres 1/4 and White Weld 1/4 of our previous interest," adding later that they "hoped that banks were not permanently out of the underwriting business and if and when we could legally do so, we would expect to recapture this business from them." Accordingly, the Lee H igginson group as reconstituted included, in addition to Lee Higginson, Edward B. Smith & Co., First Boston, White Weld and Lazard Freres. In 1936 Morgan Stanley came into the group with a 15% interest, which was slightly larger than the interest of J. P. Morgan & Co. in the pre-Securities Act period. There is nothing to show that Morgan Stanley was not invited by Lee Higginson to come in, after the organization of Morgan Stanley, for reasons similar to those which had motivated Kuhn Loeb in taking in Brown Harriman.

  The notion that an investment banking firm having "historical position" could nominate a "successor" is not part of the conspiratorial scheme alleged in the complaint. Indeed, plaintiff's theory is that the co-conspirators agree among themselves upon who the "successors" shall be. The net result, accordingly, is that this was a special situation having little relevance to any of the terms of the alleged conspiracy, concert of action and agreement. From whatever angle the matter is approached, it is clear that a new group of an entirely different character was formed, under circumstances met with nowhere else in this case.

  The final contention has to do with the 1940 issue. In December 1939, Bovenizer of Kuhn Loeb proceeded to negotiate as representative of the purchase group for the sale of new Series F bonds, to replace approximately the equal amount of outstanding Series D 4% bonds; and on February 5, 1940 the group offered to pay Chicago Union Station 101 1/2, or a basis of 3.16 to the Station, for new 3 1/4% bonds. An informal conference with the members of the ICC on February 26, 1940, elicited the suggestion that the proposed issue was one which might lend itself particularly to competitive bidding. This was authorized by the directors of the Chicago Union Station. The invitation for competitive bids was mailed on March 5, 1940, to 107 bankers, banks and insurance firms. Halsey Stuart submitted the only bid, in the amount of 98.05 for the 3 1/8% bonds which had been authorized. Without rejecting the bid or discussing the price which had been offered by Halsey Stuart, Pabst of the Chicago Union Station called Bovenizer to find out what the purchase group would now offer for the bonds. Bovenizer replied that Kuhn Loeb did not make competitive bids and would give an answer only in the event that the Chicago Union Station should decide to reject the one bid which it had received.Apparently after further conference with the ICC, Pabst advised Bovenizer that the Halsey Stuart bid had been declined, and Kuhn Loeb then informed him that the purchase group would continue the offer previously made, which, on the same basis of 3.16, was for the 3 1/8% bonds, almost 1 1/2 points better than the Halsey Stuart bid. The bonds were accordingly sold to the purchase group, whose members sub-underwrote about half of their commitment, and the transaction received the approval of the ICC. While Stuart, in his testimony, claimed that Halsey Stuart should have been given an opportunity to make another bid, contemporary correspondence shows that at the time Halsey Stuart had described the Kuhn Loeb purchase group bid as "over pricing and inadequate margin of profit"; and the outcome appears to have been that the market had gone down after the date of the Halsey Stuart bid, and Kuhn Loeb and its associates were in fact obliged to reduce the public offering price to 100 3/4.

  The Alleged "Practice" of "Traditional Banker" and "Successorships"

  As we are now dealing with the central theme of the government charge, I shall follow the course pursued when analyzing and evaluating the plaintiff's proofs on the subject of alleged domination and control of issuers, discussing the evidence principally relied on as against each of the seventeen defendant firms. I shall follow the order in which the defendant firms are named in the complaint, so that reference can easily be made to the basic facts relative to each firm, described, also in the same order, in Part II of this opinion, under the title, The Seventeen Defendant Banking Firms.1a

  1. Morgan Stanley

  In the 1935 -- 1937 triennial, immediately after the establishment of this firm, the statistics show that Morgan Stanley managed about 20% of the total new negotiated underwritten security financing. Accordingly, if there was to be a charge of conspiracy, Morgan Stanley had to be named as one of the co-conspirators.There was some difficulty about this, however, as none of the hundreds of thousands of documents, examined by the government investigators, indicating or even hinting at the alleged "rights" of "traditional bankers" or claims to "historical position" or "successorship," had emanated from the files of Morgan Stanley. No Morgan Stanley memorandum or report, diary entry, letter or telegram gave the slightest indication that Morgan Stanley had "deferred" to any other investment banker, defendant or non-defendant, or that Morgan Stanley had ever urged any investment banker to "defer" to it. No amount of argument or explanation can supply this significant absence of documentary evidence admissible testimonially against Morgan Stanley.

  To make matters worse for the plaintiff, even government counsel asserted that Morgan Stanley "had more business than they could handle," and there is much in this record to show that their strong competitive position was due to the experience, the very numerous personal relations with issuers, the technical skill in matters of finance, and especially the absolute integrity of Harold Stanley, the head of the firm.

  Sensing from the outset the importance of his credibility as a witness, I followed with great care and attention the reading of his deposition testimony and of the excerpts taken from testimony given by him in other proceedings. I checked every statement of fact with other parts of the record, and with the testimony of Harold L. Stuart, in search for discrepancies or possible equivocations or lack of frankness; and I submitted his statements, under oath and otherwise, to every one of those tests which an experienced judge applies in his everyday search for the truth. As a result I became convinced that his testimony could be relied upon.

  The fact that Stanley denied the existence of any such conspiracy as charged, and that it was wholly unknown to Stuart, is one of the significant features of the case.

  The "Master Mind"

  And yet, having in the beginning taken the position that there was "not up to this time"2a any claim of the existence of a ringleader or "master mind" to direct the operations of the alleged combination, government counsel, in the connecting statements and summations after the close of the evidence, came out flatly with the assertion that Stanley, or Morgan Stanley, which meant the same thing, was the ringleader, and that he substituted for J. P. Morgan in this role, after J. P. Morgan & Co. had decided, upon the passage of the Glass-Steagall Act, to withdraw from the investment banking business. It seems likely that government counsel had all along planned ultimately to take this position, if hard pressed, as it was originally charged that the conspiracy was formed at the time of the Anglo-French loan in 1915, under the management of J. P. Morgan & Co.; and a reluctance to make such a serious charge is understandable, because the law does not require the prosecution in a conspiracy case to show that there is a "master mind" or even to show when and under what circumstances the combination of co-conspirators was formed. Proof of such matters is always relevant, however, as it makes more probable the existence of a conspiracy; and, once a conspiracy is shown to exist, slight evidence is necessary to connect individual co-conspirators wit h the illegal undertaking, as, in the natural course of such lawless operations, particular individuals are bound to join for a time and then drop out.

  And so, the proof against Morgan Stanley, to establish the revised version of the "triple concept," as at least in effect "prior to 1933" instead of "in or about 1915" as originally claimed, and as reduced to the "lesser charge," concerning non-interference with "satisfactory relationships," all of which is supposed to be one of the regulations or terms of a "code," starts with a part of the statement prepared by J. P. Morgan and read by him on May 23, 1933, when he testified before a Subcommittee of the Senate Committee on Banking and Currency. This was received "subject to connection."

  Thus in giving his views "on the subject of the duties and uses of private bankers," as contrasted with those arising from "the laws and regulations of the government," reflected in the charter of an incorporated bank, J. P. Morgan said:

  "The private banker is a member of a profession which has been practiced since the Middle Ages. In the process of time there has grown up a code of professional ethics and customs, on the observance of which depend his reputation, his fortune, and his usefulness to the community in which he works.

  "Some private bankers, as indeed is the case in some of the other professions, are not as observant of this code as they should be; but if, in the exercise of his profession, the private banker disregards this code, which could never be expressed in legislation, but has a force far greater than any law, he will sacrifice his credit. This credit is his most valuable possession; it is the result of years of fair and honorable dealing and, while it may be quickly lost, once lost cannot be restored for a long time, if ever."

  There is nothing in the context even to suggest that the witness before the Senate Committee is referring to investment banking, much less to refraining from competition with other bankers having "satisfactory relations" with their clients or customers. The remainder of this short statement by J. P. Morgan makes it plain that he has other matters in mind. The reference to the Middle Ages probably concerns such private bankers as the Fuggers of Augsburg or the Medici of Florence, any of whom, were he alive today, would doubtless be shocked at the very notion that there was a code among private bankers to prevent him from competing with anyone for anything he wanted. When it came to honoring one's obligations on the very due day and keeping one's word, despite hardship and inconvenience and the absence of any writing, that would be a different story, one quite in keeping with the traditions of the Fuggers, and the Medici as well, when it came to matters of business.

  The document containing this testimony was not admissible testimonially against Morgan Stanley, and it would in all probability never have been mentioned but for the fact that, at a subsequent hearing on June 27, 1933, Otto H. Kahn also referred to a "code," which we shall find, when we come to the evidence against Kuhn Loeb, was a "code" of a very different character, expressive of the Otto H. Kahn "show window" policy of Kuhn Loeb.Even this reference by Otto H. Kahn was perhaps an improvisation, suggested by the NRA which was at the time in the forefront of everyone's mind. The two references to a "code" concern matters as far apart as the poles. J. P. Morgan was making an effort, after careful preparation and mature consideration, to explain what he thought was the very real contribution of private banking houses, such as J. P. Morgan & Co., to the economic well-being of the nation, wholly unmindful of the fact that those who heard or read his statement might be wondering whether or not such unregulated power in a firm of private bankers was consistent with the general welfare of a democratic nation. Otto H. Kahn, on the other hand, was merely polishing up his "show window." It is highly improbable that either of these witnesses had up to 1933, when their testimony was given, even considered the possibility that there might come a time when the Supreme Court would regard insurance or the business of investment banking as "trade and commerce" between the states.

  The first excerpt from Stanley's testimony in other proceedings comes from his examination as a witness in Morgan Stanley & Co., Incorporated v. Securities and Exchange Commission, 2 Cir., 1942, 126 F.2d 325, which dealt with a claim of statutory affiliation between Dayton Power & Light Company and Morgan Stanley, through J. P. Morgan & Co. and United Corporation. The standards to be applied were those of Rule U-12F-2, adopted by the SEC on December 28, 1938, and revoked on April 8, 1941, just after the decision of the Commission on March 27, 1941, in the Dayton Power & Light case. This Rule contained an alternative definition of statutory affiliate, for purposes of financing only, as to any person found by the SEC "to stand in such relation" to the company "that there is liable to be or to have been an absence of arm's-length bargaining" in transactions between them. The parent company was Columbia Gas & Electric. The questions put to Stanley related to efforts or lack of efforts on the part of J. P. Morgan & Co. to compete for the management of a $50,000,000 issue of Columbia Gas & Electric, which came out in 1931, while Stanley was still a partner of J. P. Morgan & Co.

  The background is, as always, relevant and interesting. Stanley was a director of Columbia Gas & Electric in the period 1922-1935; he had been vice-president of Guaranty Trust Company of New York in 1916-1927, and president of its securities affiliate, Guaranty Company, in 1921-1927. Columbia Gas & Electric brought out eight underwritten issues during 1924-1931; Guaranty Company had offered one together with four other investment banking houses, and was alone as the underwriter in privity of contract with Columbia Gas & Electric for the seven others.

  When questioned on the subject Stanley said:

  "Well, there was no reason to consider approaching Columbia. I knew personally that Columbia had adequate and satisfactory arrangements with the Guaranty Trust Company, and I assumed so long as they were satisfied with them they would continue with them."

  He also testified that while he was a partner, J. P. Morgan & Co. did not, he thought, try to obtain the business of other companies who had done business repeatedly with other underwriters; that he could not think of any case of their having done so; and that there is no reason to try to break up such relations if they are satisfactory to both parties.

  Evidently he did not at the moment recall the Missouri Pacific issue of $61,200,000 on January 26, 1931, which was managed by J. P. Morgan & Co., following nine issues handled by Kuhn Loeb in the period 1925-1930.

  But the more significant fact is that Stanley's testimony in the Dayton Power & Light case is quite consistent with his testimony by deposition in this case and with his testimony at the SEC open hearing on January 28, 1941, just prior to the adoption by the SEC of Rule U-50, requiring compulsory public sealed bidding in connection with security issues of companies affected by the Public Utility Holding Company Act of 1935.

  In explaining to the SEC his reasons for thinking that Rule U-50 should not be adopted, Stanley took the position that if the issuers found the services of an investment banker satisfactory to them, he could not see why the SEC was so anxious to force public sealed bidding on them against their will. That was what the hearing was about.

  Accordingly, Stanley volunteered the statement:

  "Mr. Stanley: Mr. Chairman, just for the sake of the record, I think you stated that you understood the investment bankers assumed theirselves to be free to solicit business. I would like to say so far as I am concerned that I do consider myself free to solicit business without responsibility to anyone excepting myself. Every man in the bond business is free to do what he wants. The reason I have not done it is that there has not been business that I wanted that I did not think was being satisfactorily done by others. If the business is satisfactorily done, it would be fair enough to think that the fellow who has it should keep on with it."

  This gives no support to the theory that there was a "code," prohibiting interference with "satisfactory relationships." Indeed, Stanley testifies precisely to the contrary.

  His testimony in this case is to the same effect. Thus he said:

  "Q. Has your practice in this regard [interfering with satisfactory relations] changed since you testified [in 1941] before the SEC? A. I don't thinks so. If we thought we would get the business we would go after it, before and after. Ordinarily when the issuer is satisfied we have not any chance of getting the business away from the man who had done business before or who is in negotiation with him.

  "Q. Well, has it been your practice to go to issuers where another banker has been negotiating or is handling prior issues and offer competing prices on better terms? A. Well, if asked to do so by the company we have exressed our opinion of the price.

  "Q. But you have not gone in and made unsolicited bids where another banker was negotiating for an issuer? A. Where you knew the terms of the issue?

  "Q. Whether or not you knew the terms of the issue? A. Well, I think we did in the case of Norway at the request of the Norwegian representative in New York.

  "Q. But you did not where the company does not ask you to do so? A. Yes, in the case of -- yes, that was subsequent to this testimony, in the case of Denmark, we endeavored to arrange to do the next piece of business for the Government, and we knew others were trying to get it. We knew negotiations were at the point where bankers were being discussed, and we endeavored to be selected by the Danish Government over the other people and were selected.

  "Q. You did not do that unsolicited for industrial issuers though, did you? A. Yes, we have in the case of the Socony-Vacuum in 1946. We went to the company and asked if they were going to be considering some financing, knowing that previously other bankers had done business with them, and they asked us to negotiate with them on an issue that shortly afterwards they did decide to consider, and told us they were negotiating with other people at the same time.

  "Q. The prior transactions with Socony-Vacuum had been done on an agency basis, had they not? A. Yes, one had. Another transaction some years before that I think was done on a public issue through Dillon, Read.

  "I might add that we -- well, that was probably before this date, I don't remember it, but we went to them knowing that at the time they were considering an agency transaction and tried to get them to make a public issue."

  The central theme about which all this discussion revolves is of course compulsory public sealed bidding, which men connected with various government agencies had for years been trying to force upon unwilling issuers. Despite all the minor questions which serve to confuse and blur the outlines of the scene of battle, and whether or not individual contestants even realized at the time that it was so, the real question was whether the old order should be swept away by government fiat. That is why it is so important that the history and development of the investment banking industry be clearly understood.

  For, on the one hand, there is the old, established way of conducting the investment banking business, which had slowly grown up functionally over the years.The testimony of Harold L. Stuart, the principal witness for the government, makes it clear that the reason why the major part of the competitive effort of investment bankers generally was devoted to an attempt to establish relationships with issuers was that the issuers willed it so. The preferences of issuers were the controlling factors. As Stuart said, if an investment banker had any sense he would not push himself in, but would wait to be "invited," and many an anxious hour was spent by investment bankers of all ranks in devising ways of playing their cards so that the "invitation" might be forthcoming. That is why there is so little price competition after the issues have been shaped up; and it is also due to the preferences and desires of issuers that suggestions are made, plans submitted and what is called by government counsel "advice" given, all without specific and separate charge. As we enter the first and second triennials, 1935-1937 and 1938-1940, the competition for business is intense and continuous, including many instances fully described in this opinion and many others in addition thereto, where one of the defendant investment banking houses competed for the business of an issuer, despite the fact that another defendant firm had managed successive prior issues of that issuer; but generally speaking they did not. The reason they did not do so more often is not that they were under any obligation or conspiratorial duty to refrain, but because of the plain common sense of the matter. In most cases where one investment banker had brought out a number of successive issues for an issuer, there was no reason whatever for a competing investment banker to think he could dislodge the firm which had been doing the business for years. This is one side of the picture.

  On the other hand, as we shall observe more closely when we come to the part of the case dealing with the campaign for compulsory public sealed bidding, there were certain men connected with the government in one capacity or another, who sincerely felt that the relationships which had thus become established in the natural, normal course of competition, should be broken up and that there should be forced upon issuers and investment bankers alike, a new way of doing business, on the basis of price competition alone, in order to "give the little fellow a chance." We shall see later the extent to which the position of the "little fellow" was improved by compulsory public sealed bidding. We shall also see how a few determined and resourceful men aided in the effort to advance the day when the views of those above referred to would be transferred from the realm of theory into that of positive and binding governmental rulings and regulations.

  But the theories were there and the facts were there. These never changed. Were the old-fashioned ways to continue; or would the new day dawn? We shall now see the results of a period of investigating, which we may take to have been carried on steadily from the public hearings before the SEC in January, 1941, down through the Grand Jury proceedings in the Southern District of New York and the six thousand odd pages of depositions taken in the course of discovery proceedings in this case. Stanley, in his effort to convince the SEC that the issuers should be permitted to run their own affairs, had told the SEC that "if the business is satisfactorily done, it would be fair enough to think that the fellow who has it should keep on with it;" and government counsel, in an avalanche of words, which did not change the basic facts one iota, came back to the subject of a "satisfactory" job, "satisfactory relations," and the like again and again.Perhaps another myth had been in the making.1b

  No amount of questions and answers, repeated endlessly, with varying formulas and a bewildering variety of ways of saying the same thing in a slightly different fashion, can obscure the basic fact that there was no "code," there was no agreement or "practice" on the subject, but that the common experience of investment bankers generally -- not these seventeen firms alone -- was that, because of the habits and preferences of the issuers, as explained by Stuart, and the normal and ordinary functioning of the investment banking industry, there was no point in running around, wasting one's time, in a patently futile attempt to get business, where a competitor was on good terms with an issuer and doing a good job.

  Once in a while, after seemingly interminable questioning, a witness may finally use some expression deemed by government counsel to be particularly helpful, as when Joseph R. Swan, of Smith Barney, in answer to a leading question says there was a "custom," or where Henry L. Bogert of Eastman Dillon speaks of not "upsetting the applecart." But the testimony of each of these witnesses must be read as a whole and the net effect is as above stated. And if each of these investment banking houses was, pursuant to its own particular policies and in keeping with its own staff and capital and needs, using every reasonable effort to get all the business within its reach, every financing that there was some hope of getting, I do not see how there can be any violation of the Sherman Act.

  There are no documents emanating from the files of Morgan Stanley to support the charge that Morgan Stanley ever claimed to be the "successor" to the investment banking business of J. P. Morgan & Co., or that it on any occasion "recognized" any other defendant firm as "successor" to the investment banking business of any of the institutions which ceased to do investment banking after the dead-line of June 16, 1934, fixed by the Glass-Steagall Act.Indeed, contemporaneous documents show that Stanley repeatedly characterized such "claims" as "far-fetched" and "silly." The references in a few of the documents of five of the other defendant firms to, "if Morgan came back in the bond business," or to Morgan Stanley as "the investment security end of J. P. Morgan & Co.," indicate no conspiratorial agreement that Morgan Stanley would be considered the "successor" to the "rights" of J. P. Morgan & Co. as "traditional banker," but only the expectation on their part that Stanley and his associates, because of their experience and their numerous personal relationships with the executive and financial officers of issuers, and their natural acumen and standing in the financial community, would in all probability be able to secure by normal and ordinary competitive means, the business of many issuers whose financings had previously been handled by J. P. Morgan & Co. There is nothing strange or surprising about this attitude on the part of Blyth, First Boston, Smith Barney (then Edward B. Smith & Co.), Glore Forgan and Goldman Sachs; and that is very likely the way the rest of the investment banking industry thought on the subject.

  From Stanley's point of view, however, the prospect did not look quite so alluring; and he and his associates did everything in their power to make the new firm widely known and to get every piece of desirable business they could secure. This competitive effort is briefly described in the recital of the basic facts concerning Morgan Stanley in Part II of this opinion,1c and need not be repeated here.

  One must not forget the superlative equipment and background which Stanley possessed; and his associates also were men of wide experience and excellent reputation. If their former connection with J. P. Morgan & Co. was a circumstance which helped them to get business, which seems highly probable, there is no reason perceptible to me why it should not have done so. After all, the Glass-Steagall Act was designed to effect the discontinuance of underwriting by the great banking institutions and their affiliates, not to destroy the livelihood of those individuals who had spent their lives working in and for these institutions and who were now making new connections and establishing new firms. Had Stanley himself for any reason dropped out of the picture shortly after Morgan Stanley was formed, I venture to say that the history and success of the firm would have been far otherwise than as is reflected in this record. Then too, it seems not unlikely that some of the railroads and other issuers who had previously done investment banking business with J. P. Morgan & Co., sought advice and the recommendation of that firm and that what they were told played some part in their decision to select Morgan Stanley. There is no proof of this in the record, but I can see no reason why the partners of J. P. Morgan & Co. should not have spoken well of their former associates, just as is commonly the case with those in other lines of business, when a long continued relationship is terminated with no loss of mutual esteem and friendliness.

  There were only three pieces of business that Stanley definitely knew were coming to the new firm before it opened its doors on September 16, 1935, and each of these was explained to my entire satisfaction. None of them lend any support to the government's claim of "successorship," de jure or de facto, conspiratorial or otherwise.

  The Telephone Business

  The final decision to set up Morgan Stanley was made around the middle or 20th of August 1935. The discussions leading to this decision were paralleled by conversations between Whitney and Stanley, of J. P. Morgan & Co., with executives of the Telephone Company who were planning to bring out an issue for Illinois Bell Telephone Company.

  Walter S. Gifford, president of American Telephone & Telegraph Company, had asked if he could borrow some people in J. P. Morgan & Co. to advise his staff in the preparation of a registration statement, and Young and Jones had been given this assignment of work. Gifford had been told in July that consideration was being given to the question of whether any of the partners or employees of J. P. Morgan & Co. would form a separate company; Gifford had heard rumors about it; and in a conversation with Stanley, at about the time the decision to organize Morgan Stanley was made, Gifford was informed of it. Stanley testified that thereupon Gifford said, "that solves my problems," and put on his hat and went home.

  Further talks with Gifford and with Charles P. Cooper, vice-president of the Telephone Company in charge of finance, ensued after Morgan Stanley opened for business on September 16, 1935. What Morgan Stanley did is summarized by Stanley in his testimony:

  "Sometime after we had opened our new offices I had talked with Mr. Gifford and Mr. Cooper, having had talks with them earlier before the formation of Morgan Stanley, to the effect that Morgan Stanley was going to be formed. I knew then that a great many people had approached Mr. Gifford wanting to undertake business for him. By 'people' I mean investment bankers. The substance of my talks with Mr. Gifford and Mr. Cooper after September 16th was that they wanted to go ahead with this Illinois Bell issue, that they had talked with the Securities and Exchange Commission, who were very anxious that the Telephone Company be one of the ones who would help get the market going under the SEC regulations and registration, and that they would like to have Morgan Stanley & Co. manage the financing. They wanted to deal with one person in the negotiation of their contract, and not be bothered by having to talk with a lot of different people at the same time, who might have several contracts of purchase, under the procedure that was current, namely, having a group of people make a several purchase from the borrower. They said they wanted us to guarantee the performance of the people that we had as underwriters, because they looked to us to select the underwriters and get good ones -- people of financial strength -- and make the marketing a success. They were very keen about making it a success.They and we both wanted a small group. Almost everybody in the business had approached them. It is obvious that you could not have everybody as an underwriter unless you had a very large group. So we selected the ones that we thought best fitted to do the job.There were other people who would be helpful but we did not need them. We thought this was a compact, good group of people, of high standing and ability."

  The issue came out on October 16, 1935, in the amount of $43,700,000; and it is hardly probable that Gifford and Cooper were being led by the nose.

  In this connection, and in my study of the record as a whole, I have given careful consideration to the very numerous documents and other evidence relating to the pre-Securities Act period; and I find nothing in this evidence to change the factual conclusions which are set forth in this opinion. In view of the ample and detailed discussion of numerous transactions in the 1935-1949 period, it would seem that any further references to "ancient history" would unduly prolong an opinion which already perhaps transcends reasonable bounds.

  There is much to be found in documents emanating from the files of other defendant firms to show competition by defendant firms and others for the Telephone Company's business, and also to show that Stanley made up the syndicate strictly on the merits and without perfunctory or other adherence to any "practice" of "historical position." A memorandum by Mitchell of Blyth records a conversation on September 25, 1935, in which Stanley stated that Morgan Stanley "intended to consider each individual business separately." Other documents of Blyth, Kuhn Loeb, First Boston and the alleged co-conspirator Mellon Securities (prior to its merger with First Boston) indicate repeated statements later emanating from Morgan Stanley, to the effect that "no precedent was to be set by this," "it is expected that when the nex financing is done that the group will be altered" and "for this issue only, and not as a precedent."

  Government counsel, citing the pendency of the long-drawn-out investigation of the American Telephone & Telegraph Co., by the FCC1d , regard all these statements as mere window-dressing, but I do not. In fact, the absence of substantial proof against Morgan Stanley on every phase of the case except the position it frankly took on the subject of compulsory public sealed bidding, and its failure to submit bids on certain occasions, which will be discussed later in this opinion, is one of the striking features of the case. A few of the other defendant firms resorted to little or great competitive exaggerations or equivocations, the methods of some, particularly in regard to directorships, are questionable, and two or three sometimes sent "polite refusals" of participations, containing statements which may be polite, but which do not accurately state the facts. But against Morgan Stanley there is none of this. Nothing emanating from Morgan Stanley and admissible against it testimonially shows any "reciprocity," or direct or indirect references to any "traditional banker": There is nothing which can be construed as giving or seeking "permission" to compete; no dallying with "historical position"; no talk of "successorships," other than a clear repudiation of the notion that there could be such a thing; no competitive policy as to directorships; no assisting in the gathering of proxies; no off-color practices of any kind. And yet I am told that Morgan Stanley is the ringleader of the conspiracy and Stanley its "master mind." It may perhaps be more reasonable to infer that the absence of any such dealings by Morgan Stanley had much to do with its reputation for integrity and for its success. We shall sometimes find indications in the statistics that the business of those few other defendant firms who occasionally used dubious methods of competition suffered as a result thereof.

  Consumers Power

  Stanley obtained another piece of business before Morgan Stanley was incorporated. After it was decided to organize the firm, Wendell Willkie, at the request of Whitney of J. P. Morgan & Co., had a conversation with Whitney and Stanley during the course of which Willkie was told about the new firm, who was to be in it, and when it was to start business. Stanley testified:

  "Mr. Willkie said that he would like to have the new company, Morgan Stanley, be joint manager with Bonbright & Company for a Consumers Power Company bond issue that he was then considering and wished to issue very soon in the fall, and I said that we would be glad to do it, if there was time to do it, to get prepared on it.

  "He spoke of the fact that he wanted to have someone in addition to the Bonbright firm who had managed a couple of Commonwealth issues previously, because the people that formerly had been the Bonbright firm had retired, and he had a very large amount of financing in contemplation at some date, and he wanted to have somebody in addition to Bonbright. He wasn't critical of them in any way, but he just wanted additional help in this issue and possibly in others, but there wasn't any discussion of others except in a vague way."

  The Issuer Summaries show that Bonbright alone had managed an $18,594,000 issue of Consumers Power, which came out on June 21, 1935; and Bonbright and Morgan Stanley together managed the issue referred to above, which came out on September 23, 1935, in the amount of $19,172,000.

  I have considered in this connection the evidence relating to the formation of United Corporation by J. P. Morgan & Co. and Bonbright, and it does not alter my conclusions.

  The third and last piece of business which came to Morgan Stanley before the firm opened for business, was a $20,000,000 issue of Dayton Power & Light Company bonds, which came out on October 14, 1935. As Edward B. Smith & Co. and W. E. Hutton & Co. were working on this issue before Morgan Stanley was formed, and as they hoped to be selected as co-managers, with some misgivings which will be discussed in a moment, government counsel described this as an example of what they call "caretaker" situations. Accordingly, this particular transaction will serve as an introduction to that subject.

  Enough has already been shown, however, to indicate that Morgan Stanley would in all probability, be in a position to secure a large amount of the most desirable financings, and to do so strictly on the merits. That Stanley and his associates chose the most favorable time to start the new firm was soon apparent, as the great depression and the uncertainties connected with the new laws had brought new financings down to a mere trickle, and they were soon to come into the market like a cataract.It was not the fault of Stanley or his associates that their reputations had evidently not been damaged, as had those of others in the business, by losses and embarrassments of one kind or another connected with the great depression of 1929 and the closing of some of the banks, followed by the Bank Holiday. The collapse of the Insull "empire" had done Halsey Stuart no good, and people were apt to remember what had happened to the Goldman Sachs Trading Corporation and others.

  The Alleged "Caretaker" Situations Dayton Power & Light

  Stanley had known Philip G. Gossler, chairman of the board of Columbia Gas & Electric, of which Dayton Power & Light was a subsidiary, since he was about 15 years old; Gossler and his wife were friends of the elder Stanleys, and it was Stanley's father, an engineer, who got Gossler his first job when Gossler graduated from Lehigh. This led later to an intimacy between the two men which was such that Gossler used to visit at Stanley's home as early as 1910, and they saw one another constantly, "inside and outside of business." It was while Gossler was president of Columbia Gas & Electric that Stanley became a director on March 25, 1922; and he served in that capacity until he resigned on February 7, 1935, just before the occurrences about to be related.

  From the early 1920s until the Securities Acts period almost all issues of Columbia Gas & Electric and its subsidiaries, including Dayton Power & Light, were managed by the Guaranty Trust Company of New York or by the Guaranty Company. Thus it was to be expected that Edward B. Smith & Co. would go after the leadership of a refunding issue which was at first planned for the summer of 1935. There was associated with Edward B. Smith & Co. the firm of W. E. Hutton & Co., who had participated in the last financing, and is included in the list of alleged co-conspirators.

  The scene opens in April, 1935, probably in the office of William C. Potter of the Guaranty Trust Company of New York, and there is a conversation between Potter, Stanley and Gossler. No representative of Edward B. Smith & Co. was present. They spoke of the "timing" for calling the outstanding bonds and obtaining the money for refunding them. Stanley urged Gossler very strongly against turning a longterm bond issue into a bank loan, and told him to wait until he had a commitment from the underwriters. The lack of any commitment at this time was not due to any reluctance or unwillingness or inability to give a commitment, but solely to the fact that the negotiations were not sufficiently advanced for one to be made. Stanley says that at that time he was sure that Gossler was going ahead with Edward B. Smith & Co. and Hutton, and that he continued to have that understanding right through the summer. The June 1, 1935, date for redemption passed without action and the next date for redemption was December 1. Later in the spring Gossler went to Europe and did not return until early in September, 1935.

  The government "caretaker" claim is based on the fact that Morgan Stanley brought out the refunding issue of $20,000,000 of bonds on October 14, 1935, and upon a memorandum of Burnett Walker of Edward B. Smith & Co., dated August 23, 1935, relative to a conversation had with Reynolds, then president of Columbia Gas & Electric. The part of the memorandum relied upon by government counsel notes that Walker and Land, both of Edward B. Smith & Co., had been careful not to get seriously into the question of a group "as I was afraid we would do the 'dirty work' and then not get leadership of the account." From this memorandum the inference may be drawn that Edward B. Smith & Co. and Hutton were "on notice" that they might lose out, but the general tenor of the memorandum is optimistic.

  The claim of government counsel is that there must have been some understanding to the effect that Edward B. Smith & Co. and Hutton would get the issue unless "Morgan came back into the bond business," in which event they would hand the business over to any new firm which should be formed for such a purpose.

  The difficulty with this theory is that Stanley has in effect denied that he knew of any such understanding, and he testified that on September 10, 1935, Gossler came in to see him upon Gossler's return from Europe, said he had seen the announcement of the formation of Morgan Stanley and that he wanted Stanley's firm to undertake the management of the issue. In view of the background of intimacy between the two men and Stanley's reputation, this does not seem to me to be in the slightest degree strange, but, on the contrary, as rather to be expected under the circumstances. That Edward B. Smith & Co. and Hutton were "on notice" that they might not get the issue may well be due to something that Gossler or one of the officers of the parent or subsidiary companies had told them before Gossler left for Europe.

  Atlantic Coast Line, Toledo & Ohio Central, Chicago & Western Indiana, Nypano (New York, Pennsylvania & Ohio) and Dominion of Canada

  An issue of $12,000,000 Notes of Atlantic Coast Line on May 3, 1935, comanaged by Edward B. Smith & Co. and Brown Harriman; one of $12,500,000 Bonds of Toledo & Ohio Central on June 27, 1935, managed by First Boston; one of $6,100,000 Bonds of Chicago & Western Indiana on December 11, 1934, managed by Brown Harriman; another of $8,000,000 Bonds of Nypano on February 13, 1935, co-managed by Edward B. Smith & Co. and Brown Harriman; and two Canadian Government issues of $76,000,000 Bonds on August 12, 1935 and $48,000,000 of Bonds on January 14, 1936, both managed by First Boston, are claimed by government counsel to be "caretaker" accounts. But the evidence does not support the charge and there seems to be no occasion for detailed comment.

  In fact the Dominion of Canada situation shows successful competition by Morgan Stanley, who succeeded in obtaining the leadership of an issue of $85,000,000 Bonds on January 21, 1937, although First Boston was supposed to be the "traditional banker," and there is nothing to show that there had been any deterioration in the relations between the Canadian Government and First Boston when, early in 1936, Henry S. Morgan went to Canada and called on the head of the Bank of Canada and on the Minister of Finance to offer the services of Morgan Stanley. Perhaps Stanley had forgotten about this when he testified before the SEC on January 28, 1941, in opposition to the proposed Rule U-50.But it seems more likely that he thought the incident not particularly relevant to the point he was trying to put across, which was that if the business was being done to the satisfaction of the issuers he could not see why government officials were so anxious to force them into public sealed bidding. After all, the issuers could always use public sealed bidding as a means of raising the capital they needed, and perhaps they knew their business better than those who had an axe to grind.

  I find that Morgan Stanley at no time "adhered" to any "practice" of "traditional banker," nor was Morgan Stanley at any time a party to any conspiracy or agreement on "successorships," nor to any "code" having such or any similar provisions.

  2. Kuhn Loeb

  With a small firm and a very choice and select clientele, Otto H. Kahn and his partners had evidently made a wise move when they worked out the Kuhn Loeb "show window" policy.1e It had functioned smoothly in the era of "dignity and mystery." A few of those still alive today remember the rows of silk hats at the Lawyers Club in the old Equitable Building in New York City, as the leaders of the bar gathered for luncheon. Even the writer of this opinion remembers Samuel Untermeyer in court, with an always-fresh orchid in his coat lapel, and dressed in the height of fashion. Perhaps the appearance of Otto H. Kahn was in keeping with his "show window."

  Taking into consideration the fact that Kuhn Loeb took no part in public utility financing, its position in 1935-1937, the first triennial of our "evidence" period, must have been viewed with envy by many other firms in the business. It led the entire industry in rail issues, with 12.5 issues for a total of $344,100,000, or over $27,500,000 per issue. It also led in dollar volume of negotiated industrials and was second in number of issues.The number of issues was 17.1 and the dollar amount $503,700,000, almost $30,000,000 per issue. The total of such issues for all investment bankers during this period was 316, and the total dollar amount $2,758,700,000, or less than $9,000,000 per issue. The steel financing headed or co-managed by Kuhn Loeb in the period included: Bethlehem $158,000,000; Republic, $94,000,000; Inland, $61,000,000; National, $60,000,000; and Wheeling, $35,000,000.

  The operation of the "show window" policy fitted perfectly into this background, as the competitive problem of Kuhn Loeb was to seek to maintain its position against the competition which such a position plainly invited And the Sherman Act makes no distinction between competitive effort to keep business and competitive effort to take business away from someone else. These are but two sides of the same coin.

  Accordingly, as step one, it was necessary to broadcast as widely as possible, but still with restraint and discretion, the high-toned and exclusive character of the firm.This was done, as we shall see, by statements which must sometimes seem almost exaggerated and gratuitous, to the effect that Kuhn Loeb would never under any circumstances try to "steal" business from any other investment banker. Indeed, it would apparently insist upon having the officials of an issuer, seeking to bring its financings to Kuhn Loeb, make a downright and unequivocal statement that they had completely severed all relations with their former bankers. We shall see later how flexible this formula was, in actual practice. What is more, Kuhn Loeb gave wide currency to the fact that it was their policy only to handle financings on the understanding that the negotiations would be had with Kuhn Loeb exclusively, and that they would under no circumstances engage in price competition, which was below their dignity. If issuers wanted tip-top service Kuhn Loeb was the firm to come to, but it must be on these terms. Consistently with the "show window" policy, we find throughout the record numerous instances of Kuhn Loeb participating in various underwritings only with a "non-appearing" or "silent" position, where it did not want it generally known that it would stoop to take anything less than top position (or second only to Morgan Stanley), which was the only one consistent with its eminence and dignity.

  With this background, it requires no unusual acumen to discover the reason why most of the "traditional banker" documents in evidence in this case are written by partners of Kuhn Loeb, or are based upon something said by one of its partners or employees. In the early stages of the trial such statements were always described by government counsel as having been made by "the defendants," despite the fact that no one connected with any of the other sixteen defendant firms had anything to do with them, in most cases did not even know the documents were in existence, and had quite different business and competitive policies. But there is something of this in every conspiracy case; and the trial judge must be on his guard until the existence of a conspiracy and participation in it by the other defendants is established, lest the others, or some of them at least, suffer some prejudice.

  Step two of the Otto H. Kahn "show window" policy is ingenious and almost fool-proof. If the particular piece of business, brought in by a middleman or finder, for example, was not of such a character as fitted into the Kuhn Loeb picture, an unqualified display of the "show window" was called for, perhaps to be followed up by transmitting a copy to or otherwise informing such other firm as might consider themselves as having the inside track, that Kuhn Loeb had refused to "intrude," in order to put such other firm into a friendly frame of mind with respect to a possible substantial participation in the future.1f Where the business looked attractive, however, there were various expedients which could be resorted to, in order to go after the business, but do so in such a way that there could in all probability be no loss of prestige, such as would be the inevitable consequence of a rebuff, news of which would be bound to get around. We shall see how varied is this technique when we come to discuss some of the issuer situations on which government counsel lean heavily for support, such as Commonwealth of Australia and especially Armstrong Cork.

  A few of the documents, even as early as 1934, mention one or another defendant firm as "successor" to some banking institution or affiliate which had ceased to do investment banking business because of the Glass-Steagall Act, but a glance at the context and the dates of the documents will show that these statements indicate no conspiratorial agreement or proposal to agree upon such firms as "successors," but only the normal expectation that anyone in the business might have that the individuals who had formerly been employed by such institutions, and who had personally handled the financings of particular issuers, probably would be able to take the security business of such issuers with them to their new firms. Accordingly, I shall make no further reference to "successorship" in connection with Kuhn Loeb.

  The Otto H. Kahn "Show Window"

  The testimony of Otto H. Kahn2b and the questions of Senator Barkley and Mr. Pecora are given in full, as follows:

  "Mr. Kahn: Well, if you want a categorical answer, Mr. Pecora, I can only say it is always the other way around; has been with us for 50 years perhaps, or certainly for the last 30 or 40 years. It is not we that go to the corporations and ask them to do business with us. We hope that we have established a reputation which is our show window, which attracts customers. We hope that our trade mark, our sponsorship is recognized of some value to the corporation. We do not go after them. That may be conceited, but we do not. We would rather do less business. We do not go after them. But if a railroad comes to us, or if any corporation comes to us and says: 'We want to place a $50,000,000 issue through you,' and we know they have been doing business with somebody else, we ask them fairly and openly the question, 'We know that you have been doing business with so and so; are you not doing business any longer with them?' 'No. we have severed our connection.' Then we consider ourselves entirely free to do their business.

  "Senator Barkley: But, if you knew that in the preliminary stages of the floating of the $50,000,000 loan they had been under negotiations with some other bank you would not step in voluntarily and seek to take that client away from the other bank?

  "Mr. Kahn: I would not seek to take any client away from anybdy. I am seeking to develop in our own business and my associates are seeking to develop in our own business.

  "Senator Barkley: Is there not a very well developed code of ethics among bankers that one banker will not try to take business away from another banker?

  "Mr. Kahn: I think it is a wellrecognized code of ethics, and it is getting better through the country.

  "Senator Barkley: That is undoubtedly a fact, though, is it not? It seems to me that a very simple proposition which a simple answer would clear up.

  "Mr. Kahn: I am not prepared to say that it is a fact, Senator. No; I am not.

  "Senator Barkley: Well, then, the conditions are not as ethical as you might hope that they could be?

  "Mr. Kahn: I believe I have already shown that in 1926 to 1928 the conditions were such as I am far from approving. But I believe that especially under the new Recovery Act it will be more and more recognized that that kind of competition is detrimental, and is perhaps slightly unethical.I can speak for ourselves.We do not go after other people's business. We do not go after business at all. We have our shop window, as I call it. If somebody comes to us and says, 'I would like to do business with you. I have heretofore done business with John Smith.I would like to do business with you.' We would say, 'Do you mean to say you have definitely broken with them?' 'Yes.' 'And you tell use you are free, without infringing upon our conscientious scruples, to do business with us?' 'Yes.' I would not then hesitate to do business.

  "Senator Barkley: Do you know instances where other bankers have gone after your business?

  "Mr. Kahn: I have some, Senator. I hope you will not press me.

  "Senator Barkley: I am not going to press you, but it has occurred?

  "Mr. Kahn: Yes.

  "Senator Barkley: Are they reputable bankers -- without giving their names?

  "Mr. Kahn: Yes.

  "Mr. Pecora: Has it succeeded? Has the effort succeeded in those instances?

  "Mr. Kahn: In some instances, yes. We are poorer for that effort.

  "Senator Barkley: Do you still regard them as reputable bankers?

  "Mr. Kahn: I regard them as reputable bankers. I would not have done what they did, but who am I to sit in judgment upon others? 'Let him who is without sin first cast the stone.' I guess I am guilty of other sins, too. But this particular thing I do not believe in.

  "Mr. Pecora: Would you say fairly, Mr. Kahn, that in the banking profession a system or code of ethics exists among the well-recognized bankers, bankers of reputation, in pursuance of which there is no competition among them for the business of a corporation which has had financing previously done for it by some banker?

  "Mr. Kahn: As far as we are concerned, that is correct. As far as our firm is concerned, that is correct."

  This has no reference whatever to the "code" of private bankers concerning which J. P. Morgan had testified at a separate hearing a month or so previously. Otto H. Kahn was questioned specifically on the subject of trying to take business away from another investment banking house, and he very plainly states that it is a Kuhn Loeb "code" about which he is speaking. He describes it as the Kuhn Loeb "show window." Naturally the witness, not being questioned on the subject, adds nothing about the ingenious ways in which the "show window" policy is manipulated as a competitive device to get business.There was no reason why he should disclose firm secrets, unless it became necessary to do so.

  The prosecution emphasizes some TNEC testimony given by John M. Schiff in 1939 concerning his memorandum in the Armstrong Cork matter, which will be referred to shortly, but his explanation is quite consistent with the "show window," as he points out that this was not only because of "the code of ethics" but "it is what is good business." His testimony by deposition in the present case to the effect that at the time he testified the Otto H. Kahn policy was still in effect, must be read with some reservation, as it is obvious that much water had gone over the dam since 1933, the era of "dignity and mystery" was over, and no one in the 40s, and especially after World War II, could be expected to be greatly impressed by the sort of thing that Otto H. Kahn testified was done by Kuhn Loeb in the early 30s and prior thereto. As a matter of fact, we shall find less and less of the "show window," and a Kuhn Loeb competitive policy in later years which was more in keeping with the times.

  Pursuing the matter chronologically, and in an attempt to give the full picture without discussing every one of the documents, we come to what is described as a "Memorandum regarding Bulgaria" bearing the Kuhn Loeb filing stamp of October 26, 1928.


  This was a patently unattractive piece of business and we find the "show window," without any angling for a continuance of negotiations, and without qualification. The memorandum reads:

  "We would not care to compete for or attempt to secure the pending issues simply on question of price, but if the Bulgarian government has no commitments towards its present affiliations and wishes to terminate them, we would be prepared to study carefully and promptly the Bulgarian fiscal situation with a view to undertaking the financing of the government's requirements, if in such case the government will make definite agreement for a term of years constituting us its American bankers and giving us a preferential position as to future issues. * *"

  There the matter ended, as far as appears in this record.

  Anticipating somewhat, there is a letter from Buttenwieser of Kuhn Loeb to Oscar W. Rexford of Ley P. Rexford & Company, dated April 22, 1935, sent in obvious ignorance of what the Rexford approach, noted in the letter, referred to. Again the "show window" is without qualification and the second and last paragraph of the short letter reads:

  "I might also point out for your guidance that, as you may know, we make it a strict rule not to compete for business and to discuss such matters only on an exclusive negotiation basis."

  It turned out that what Rexford was after was a participation in the forthcoming issue of Southwestern Bell Telephone, and Buttenwieser informed Rexford on April 27, 1935, according to a Kuhn Loeb memorandum of that date, that Kuhn Loeb had a "group relationship in telephone business" and that Rexford should not expect any "special treatment."

  Commonwealth of Australia

  We now come to a substantial and attractive piece of business. In the period from 1925 to 1928 J. P. Morgan & Co. had placed three issues of Australian bonds in the United States totalling some $165,000,000. In April and May, 1930, there were conversations between Herbert Brookes and other representatives of the Australian Government, and Kuhn Loeb, relative to the handling of some new Australian financing.

  The first Kuhn Loeb memorandum, of April 23, 1930, makes no reference whatever to J. P. Morgan & Co. The whole tenor of the conversation related in the memorandum is one of anxiety to get the business and the qualifications to the "show window" policy are conspicuous. To begin with, it was suggested that "the cost to the Australian Common wealth should not exceed approximately 6% per annum." The mention of "price" is significant. The reference to interference "with existing financial relationships with other banking houses," is qualified by the phrase "when these were more or less definite"; and the statement of the Kuhn Loeb policy not to make competitive bids is followed by, "except in very rare instances, such as City of New York bonds, and then only because of very special reasons." The "very special reasons" are not explained.

  The notion of an exclusive arrangement is watered down to the vanishing point, as the Kuhn Loeb representatives Mortimer Schiff and Sir William Wiseman

  "pointed out also that Kuhn Loeb & Co. had always felt and still feel that they could only render the best service when they had a continuing relationship and while they understood perfectly that no government could bind itself definitely as to the future they would still hope, if relationships were established with the Australian Commonwealth, that it would be the intention to continue such relationship after an initial issue, if the service Kuhn Loeb & Co. could render proved satisfactory to the Commonwealth Government."

  The standard Kuhn Loeb requirement, that there be an expression of severance of relations with the bankers with whom they had previously been doing business, is also skillfully worded. It follows:

  "Kuhn Loeb & Co. would consider it a very real privilege to become the bankers to the Australian Commonwealth, and would be most receptive and sympathetic to a proposal to this effect. They take it, of course, that the Commonwealth would not extend such an invitation unless they are entirely free from commitments, expressed or implied, toward other bankers for its financing in this country."

  The conversation closed with an expression of hope that, after these observations had been communicated to the Prime Minister, the conversations might be continued, "which would be most agreeable to Kuhn Loeb & Co."

  A few days later, however, these sanguine hopes of Kuhn Loeb received an unexpected setback, as James R. Collins, financial adviser of the Commonwealth Government, who had just arrived from London, called on May 5, 1930, with the bad news "that he had instructions from his government to come to New York but no further instructions, and therefore at the moment he had no mission." And so for the first time in these particular negotiations, as far as appears from the documents, a full display of the old "show window" is made. Collins fully understands that Kuhn Loeb "should not be put in the position of appearing to have made an unsolicited bid," and that "an official request for a study of the situation and an offer should come from the Australian Government." For the first time Morgan is mentioned: "particularly stressing our views regarding the Morgan situation and policy of noncompetitive and exclusive negotiations."

  Thus, despite Kuhn Loeb's apparent willingness, three weeks earlier, to take the business away from J. P. Morgan & Co., the "traditional banker," if it could succeed in doing so, this new and unexpected development must have led to the suspicion that J. P. Morgan & Co.'s competitive position was stronger than they had thought, and the shift in strategy, which has just been described, was adopted by Kuhn Loeb. And so the matter was left that Collins would cable his government and see Kuhn Loeb again on the following Wednesday.

  Accordingly, Collins called again on May 9, 1935. The answers to his cables had not been "entirely satisfactory to him," the Australian government evidently desired "the advice of several leading New York bankers." And so, now definitely abandoning the hope that Kuhn Loeb might get the business for itself alone, there is a further shift in strategy designed, if successful, to get the co-managership with J. P. Morgan & co. This was just as inconsistent with the alleged conspiratorial scheme as was their first move to get the managership, as J. P. Morgan & Co. was obviously the "traditional banker," not a word had been spoken of any lack of "satisfactory relations" between the Commonwealth and J. P. Morgan & Co., and Kuhn Loeb should have "deferred"; but it did not.

  Accordingly, in this conversation with Collins on May 9, Schiff "strongly advised him not to consult any other bankers except Morgan's; that he felt they probably ought to consult Morgan's." The memorandum continues:

  "Mr. Schiff suggested that it might be in the best interests of the Australian Government if the banking basis is broadened to include both Morgan's and ourselves, but, of course, this was not a suggestion that we could make to Morgan's but could be properly made by Mr. Collins if he should come to the conclusion that would be a desirable thing."

  The conclusion of the memorandum is interesting, too, in view of the part of the Kuhn Loeb policy against price competition, which also seems subject to qualification, according to the exercise of the Kuhn Loeb judgment and discretion. Thus the memorandum indicates discussion of price and Schiff, in his best competitive manner, but all the while seeming not to desire to "intrude," plants the seed that "he thought the former Commonwealth loans had been issued at too high a price," and he mentions figures which come down to a cost to the Commonwealth of "6% or a shade under." The price mentioned in the first conference with Brookes on April 17, 1935, had been "approximately 6% per annum," which might be 6% or a shade over.

  The last memorandum of the series is dated May 13, 1935. Collins had seen "morgan's," had made it perfectly clear that he had taken the initiative in approaching Kuhn Loeb and that Kuhn Loeb had said they "would not care to enter into negotiations with the Australian Government without the knowledge of Morgan's" and "without a direct invitation." "Morgan's" expressed appreciation and Collins is going back to London.

  Here the matter ends, as no financing was done at the time. Naturally, nothing appears to have been passed along to "Morgan's" about Kuhn Loeb's first effort to get the business for itself; and Collins seems to have had enough common sense to realize that the suggestion about the co-managership was intended for his ears alone and not to be passed along to "Morgan's." In any event the last memorandum, which records Collins report to Kuhn Loeb of his conversation with "Morgan's," contains no reference to the co-managership.

  Armstrong Cork

  This is one of the foundation stones of plaintiff's case; and one of the Kuhn Loeb documents relating to Armstrong Cork furnishes the phrase which is the theme of the complaint, as paragraph 45A(1) alleges:

  "Defendant banking firms observe an ethic not to compete and refuse to 'poach on each other's preserves.'"

  The subject is of additional significance as the transactions about to be related took place in 1934 and 1935, shortly after the Glass-Steagall Act deadline.

  The background shows that in the pre-Securities Act period the last issue of Armstrong Cork was a financing of $14,931,000 of convertible debentures in June 1930, in connection with which Guaranty Company and Union National Bank of Pittsburgh were in privity with the issuer. And so we should expect to find, in accordance with the aggressive policy adopted by Swan when he left the Guaranty and joined Edward B. Smith & Co., an immediate effort on the part of Swan and his associates to get in touch with the Armstrong Cork people, and seek to continue the close personal relationship which had existed between the officials of the company and Swan and his associates while still with the Guaranty. That is precisely what the documents reveal, and this is further supported by the testimony of Swan that, "we immediately contacted" the Armstrong Cork Co. As no financing seemed in immediate prospect, the matter was dropped for the moment; but we shall find Swan, and the others in Edward B. Smith & Co., in prolonged and continuous negotiations with company officials later on.

  The scene shifts to the office of Kuhn Loeb where, on July 26, 1934, Freeman, the middleman or finder, arrived with a proposition that Kuhn Loeb become interested in "the possibility of doing some financing for the Armstrong Cork Company," with which Freeman claimed to have some connection. This was an attractive and desirable piece of business, and it will be interesting to see how the Otto H. Kahn "show window" policy was put in operation.

  The first paragraph of the memorandum of July 27, 1934, dictated by Schiff of Kuhn Loeb, reads:

  "Yesterday Mr. M. L. Freeman discussed with me the possibility of doing some financing for the Armstrong Cork Company, with which he has a connection. I told him that I would discuss it here in the office, and asked him to return today."

  This gave the partners of Kuhn Loeb an opportunity to confer about the matter and lay their plans.

  The memorandum continues:

  "Having checked up on the Company and found that the original financing had been done by the Guaranty Company, I explained to Mr. Freeman that the Guaranty Company's successor was E. B. Smith & Co., and that naturally we did not want to poach on their preserves."

  The reference here, at this early date, to Edward B. Smith & Co. as "the Guaranty Company's successor" cannot, it seems to me, mean more than the normal reaction of any firm in the investment banking business, to the fact that Swan, the former president of the Guaranty Company, and many of the old Guaranty Company's employees had gone with Edward B. Smith & Co., and would probably make every effort to take along with them to the new firm the business of people with whom they had previous personal dealings.

  The memorandum continues:

  "However, he told me that in 1932 the Company had wanted to borrow $2,000,000 from the Guaranty Trust Company, with whom they have an account, and that the Bank was not willing to loan them more than $500,000 at that time. The Armstrong Cork Company was very distressed at this and later raised the money through Pittsburgh banks and therefore at present are not desirous of doing business with the Guaranty Company or their successors."

  As some indication of the many different interpretations which can be given to the phrase "satisfactory relations," government counsel claim that this rumor, relayed by Freeman, indicates that there was a lack of "satisfactory relations" at this time between the Armstrong Cork people and Swan and his associates in Edward B. Smith & Co. But this could not have been so, if reliance is to be placed upon the numerous statements in the Edward B. Smith & Co. status book and the testimony of Swan, both of which indicate continuous and friendly negotiations, from the time that Swan went with Edward B. Smith & Co., up to the time that the next issue, a financing of $9,000,000 of debentures, came out on July 24, 1935, under the sole management of Edward B. Smith & Co.

  The memorandum continues:

  "Likewise, Lehman Bros. had approached the Armstrong Cork Company with the idea of buying a block of stock from them, either existing stock in the hands of present holders if they did not need new money or, if they needed new money, treasury stock. However, this did not appeal to the Company."

  This is the last we shall hear about competition by Lehman Brothers for the Armstrong Cork business, but it indicates that at least as to Lehman Brothers, the "practice" of "traditional banker" and "successorship" was not being observed. They also knew, of course, that Swan and his associates had left the Guaranty and gone over to Edward B. Smith & Co., and could easily have ascertamed the fact that the "traditional banker" was the Guaranty.

  We now come to the most interesting part of the memorandum as it shows the special technique put in operation by Kuhn Loeb as part of its "show window" policy, when it really wanted the business. The memorandum continues:

  "Mr. Freeman explained that the Company needs from five to ten million dollars for improvement to their plants and would like to issue a preferred stock. He realizes, however, that probably a preferred stock would not be feasible at this time and suggested four or five year notes convertible into stock. I told him that provided he explained in detail to the company that they were coming to us of their own free will, we should be pleased to have a talk with them if he would bring in one of their senior officers the next time he was in New York, which he agreed to do."

  We do not know how long it took Freeman to persuade the Armstrong Cork officers to come in and confer with Kuhn Loeb "of their own free will." Certainly Swan and his associates in Edward B. Smith & Co., who had been seriously working on the negotiations since at least as early as October 1934, had no inkling of what Kuhn Loeb was doing. It does appear that sometime prior to March 14, 1935, Freeman had persuaded the executive officers of the Armstrong Cork to come in and talk to Kuhn Loeb. Strauss testified before the TNEC that the Armstrong Cork officials came in to see him after telegraphing for an appointment, and that he discussed financing with them. He also stated in response to a question by Mr. Nehemkis:

  "Q. But at that time you did not feel constrained to discuss the matter with E. B. Smith & Co.? A. I had nothing to discuss with E. B. Smith & Co."

  Accordingly, on March 14, 1935, when Strauss of Kuhn Loeb perhaps suspected that all was not going well, or perhaps with the "show window" policy in mind, wished to be sure that nothing might occur to damage the "show window," such as would be the case if it appeared plainly that Kuhn Loeb was going after business and failed to get it, we find Strauss going over to Edward B. Smith & Co., where he told Swan and Cutler that Kuhn Loeb "had this business," and he asked if they would be interested in joining them. This must have come as quite a shock to Swan and Cutler and they immediately "explained that this was an old account of ours and we believed it was still ours," according to one of the Edward B. Smith & Co. status book entries.

  At this point things began to happen.We can only surmise the Kuhn Loeb end of the matter. It seems not unlikely that, when the Armstrong Cork officials made their "unsolicited" call on Kuhn Loeb, the Kuhn Loeb partner who conferred with them went through the usual formula about having severed relations with their regular banker, or having no "commitments," or whatever other variation of the formula seemed appropriate. Business men catch on to this sort of thing very quickly, and from what occurred in the Bethlehem Steel financing and others, it seems probably tht the Armstrong officials gave the necessary "assurances," despite the fact that all the while their relations with Swan and his associates continued to be friendly and satisfactory in every way, and the negotiations with Swan and his associates were proceeding apace.

  Having received notice that Kuhn Loeb was competing for the business, Swan and his associates redoubled their efforts. The same status book entry which contains the reference to the visit by Strauss indicates that Cutler immediately talked to Roy Passmore at the Guaranty "who said that he had been in conversation with officers of the Company within the last thirty days and felt very sure that there was nothing in KL's contention, and that the Company would not do anything without discussing the matter with them at the Trust Co. first, and that he could not believe they would accept any other offer without giving us a chance." This entry on March 19, 1935 concludes:

  "I suggested it might be well for us to take a day and run down to Lancaster and see the plant and he [Swan] thought this would do no harm."

  The very next day, March 20, 1935, Cutler reports another talk with Strauss, at which Strauss was told that the Armstrong business was "our business and that when something could be done they would look to us." This entry concludes with some more of the same Kuhn Loeb "show window" technique, as follows:

  "Strauss said if that were so KL would not compete, and that he would so inform the Armstrong people. If they really wished to make a change and clear with us, KL will then be willing to talk to them. We indicated that if and when the business would be done we would have a place for them."

  On March 21 Cutler called Suter, one of the Armstrong Cork officials, at Lancaster, about making the visit to the plant, but both Suter and Prentis were to be away and Suter suggested coming down the following week. The visit to the plant did not actually materialize until April 3, 1935, at which time there was considerable discussion of the forth-coming financing.

  By this time Strauss had evidently got the lay of the land, and, according to Swan, "had done all the competing he could do." In the meantime, the conversations between the Kuhn Loeb partners and the officials of Armstrong Cork had so impressed these executives that we find later that Kuhn Loeb was, according to a memorandum of Horace D. Moore of Edward B. Smith & Co., dated September 21, 1935, included in the business with a 20% participation "at the request of the Company." This will be referred to again.

  Now we shall see another phase of the "show window" policy. Having competed for the business, and having done so behind the back of the "successor" to the "traditional banker," and having failed, a face-saving maneuver was in order. Consequently, the later memoranda indicate Strauss exhibiting anxiety to make it clear that he is reporting to Edward B. Smith & Co. whenever he confers with the officials of the company, and that, whenever he confers with the officials of the company, he is reporting conversations had with Edward B. Smith & Co. Kuhn Loeb having told Freeman in the beginning, with reference to Edward B. Smith & Co., that "we did not want to poach on their preserves," Kuhn Loeb is careful to leave the matter at the end on the same theme, despite the fact that they had in the interval been quietly and secretively making every possible effort to get the business. And, whilst thus competing for the managership, Kuhn Loeb had its eye on a substantial participation, which was always one of the desiderata when the "show window" policy was working.

  We have already noted that, due to hard work and continuous negotiations with the officials of Armstrong Cork, Edward B. Smith & Co. found it possible to hold on to the business, which they had handled as individuals while still with the Guaranty Company, and Edward B. Smith & Co. as sole manager brought out the $9,000,000 issue of debentures on July 24, 1935. But, in the interval, although Lehman Brothers had dropped out of the competition, other defendant firms, in complete disregard of the "practice" of "traditional banker" and "successorship," were making strenuous efforts to get this same piece of financing for themselves.

  On February 5, 1935, according to a memorandum entitled "Armstrong Cork Co." of A. M. White, Jr. of White Weld:

  "I met with Al Gordon of Kidder Peabody today and it was agreed that Kidder Peabody and White, Weld would have 70% and 30% interests respectively on original terms in the above piece of business."

  It is interesting to see the way this came about, as we hear so much about "successorships." It seems that Moore, a former vice president of the Guaranty Company, had become associated with Kidder Peabody, and Albert H. Gordon of Kidder Peabody testified on deposition that Moore, evidently seeking to take advantage of his former association with the Guaranty Company, which was a perfectly proper thing for him to do, tried to get the business of Armstrong Cork for the Kidder Peabody-White Weld nucleus group, "but he was unable to put us across."

  The outcome was noted in a White Weld memorandum of June 25, 1935:

  "Gordon of Kidder, Peabody told me yesterday that they had lost the lead in the above piece of business, and that E. B. Smith had landed it. Gordon stated that after a great deal of work K. P. had succeeded in obtaining a 16% interest for themselves, and that they had done everything possible to get us into the business, but did not succeed."

  Another memorandum indicates, as we have already noted in connection with other group competition arrangements described in the earlier portions of this opinion, that the Kidder Peabody-White Weld "partnership" to go after this particular piece of Armstrong Cork business, had, only a short time previously, "appeared certain" of landing it.

  When the issue came out there were only four participants, Edward B. Smith & Co. in first position had 40%, and Kuhn Loeb, Kidder Peabody and Lazard Freres, all in second position, with 20% apiece; and an Edward B. Smith & Co. memorandum of September 21, 1935, states that Lazard Freres, Kidder Peabody and Kuhn Loeb "were included in this business at the request of the company."

  Government counsel assert that Kuhn Loeb "recognized" the claim of Edward B. Smith & Co. that it had "inherited" the Armstrong Cork business from the Guaranty.But, piecing all the documents together, it seems much more reasonable to infer that at least Kuhn Loeb and Kidder Peabody, and possibly Lazard Freres and others, competed for the managership, and, having failed to obtain it, Kuhn Loeb and Kidder Peabody were satisfied to settle for participations. Indeed, they did quite well, with 20% apiece, as above stated.

  Thus we see the sort of competition for managerships and participations which has been going on for years in the investment banking business.Each firm follows its own policies and its own techniques.The "show window" policy of Kuhn Loeb, with all its carefully planned and intricate maneuvers, finds no counterpart in the policies of any of the other defendant firms.

  But there is one further document relating to the 1935 issue which stands alone, without attendant circumstances or explanation of any kind. It is a private wire telegram from R. Cheston, Jr., a Philadelphia partner of Edward B. Smith & Co., to Cutler in the New York office, dated June 28, 1935, only a few days before the $9,000,000 issue of debentures came out. It reads:

  "Don't forget we owe Brown Harriman real consideration when as and if we wholesale the Armstrong Cork debentures on account of their attitude that we inherited the business."

  Perhaps someone in the Philadelphia office of Edward B. Smith & Co. was trying to get some credit for relaying a garbled version of some conversation, direct or reported, with someone in Brown Harriman. But there is no basis in the record for any speculation on the subject. In any event, Brown Harriman did not become a participant in the forthcoming financing, and we are told nothing more about the matter.

  The subsequent financing, however, shows that the competitive efforts of Kidder Peabody in connection with the 1935 issue were ultimately rewarded, as is so often the case.

  Gordon of Kidder Peabody explains how Kidder Peabody became co-manager of the July 10, 1937, issue of $9,068,000 of common stock as follows:

  "In 1937 we again attempted to obtain the business.We submitted a proposition to the company that was superior to the proposition submitted by E. B. Smith & Company.

  "E. B. Smith & Company was successful in gaining their way back into the business and we became a joint manager.

  "Since that time whenever there was an issue in prospect we have done everything that we could to obtain the leadership of the business. We have submitted proposals and we have talked to the company industriously to advance our cause."

  This 1937 issue was brought out under the co-managership of Edward B. Smith & Co., Kidder Peabody and Mellon Securities. Edward B. Smith & Co. is having difficulty holding on to the business. Not only have both Kidder Peabody and Mellon Securities elbowed their way in, but there are now five underwriters, all in first position at 20% each, and Edward B. Smith & Co. has been forced to give up half of the 40% participation it held in the 1935 issue. How Mellon Securities succeeded in obtaining a co-managership does not appear; but one would suppose that, if a conspiracy were in operation, Kuhn Loeb, Lehman Brothers, Kidder Peabody, White Weld and Mellon Securities, which is also claimed as a co-conspirator by government counsel, should all have "deferred" throughout of Edward B. Smith & Co. as the "traditional banker" because it was "successor" to the Guaranty.

  A $16,596,000 issue of cumulative preferred stock came out on September 13, 1945 co-managed again by Smith Barney (Edward B. Smith & Co. in the meantime having merged with C. D. Barney & Co.), Kidder Peabody and Mellon. The efforts of Mellon Securities to improve its position and its disappointment at being unable to do so are related in a Mellon Securities inter-office memorandum, dated June 1, 1945, by Charles W. Kennard, who describes a conversation which took place on May 29, 1945, between himself and Warnock, one of the Armstrong Cork executives. It is worth reading as it reflects a good deal of the sort of thing described in this opinion. It follows:

  "Mr. Warnock then said that upon his return to Lancaster the previous week after visiting with the two other co-managers and myself, he had delved into the history of the Company's financing. He found that the individual who had had the longest personal association with the Company was F. L. Moore of Kidder, Peabody & co. He added that, furthermore, Moore had remained in closest contact with the Company over the years since the last financing and had been most helpful to them. In view of this, if there were any special perquisites attached to the financing, he thought it would be only fair if they went to Kidder, Peabody & Co. However, the longest association with an organization was with that of Smith, Barney & Co. with whom was the organization that handled the financing when done by the Guaranty Company. The record showed that the financing had been well handled by this organization. Taking into account all the circumstances Mr. Warnock said that he had made the following determination. The three firms, Mellon Securities Corporation, Smith, Barney & Co. and Kidder, Peabody & Co. would be true co-managers in every meaning of that word although in the previous financing this had not been the case. The three co-managers were to sit down together and select the members of the underwriting syndicate and each member would be entitled to invite one-third of these members into the account.On the general set up of the deal and on the preparation of the various papers, etc., each of the co-managers would have an equal voice. However, it was still necessary for one firm to act generally as clearing house and to run the books in the sense of handling the mechanics of the deal. He had decided that Smith, Barney & Co. should continue to do this and that the three firms should appear in the same order as in the previous financing. I thanked Mr. Warnock, but said that of course I could not help being a little disappointed. I had hoped that in view of the Pennsylvania nature of the deal, the Company's Pittsburgh relationship and the position of Mr. Prentis on the Board of the Union Trust, we would be selected to handle the books and act as clearing house. Mr. Warnock said that he understood how I felt, but that under his proposal nobody would lose face and there would be no hurt feelings. He thought that this was of substantial benefit to the Company. I told him that I would like to discuss his proposal with my associates and would get in touch with him in the near future."

  Bethlehem Steel

  Government counsel have blown hot and cold on the series of post-Securities Act issues of Bethlehem Steel; but they came back to this issuer in the connecting statements. As usual, a phrase here or there seems to help plaintiff's case, but the documents and deposition testimony taken as a whole show vigorous competition at variance with the rules of the supposed conspiracy. We shall see how the Kuhn Loeb "show window" fits in.

  During the pre-Securities Act period the Guaranty Company or the Guaranty Trust Company of New York had been identified with Bethlehem financing since 1917, and for the last four issues, 1926-1929, only the Guarantly Company is known to have been in privity of contract with the issuer. As "I suppose this was the biggest account we had," Swan testified that he got right after the business even before June 16, 1934, the Glass-Steagall Act deadline. After some conversations with the executives and on June 12, 1934, Swan organized a nucleus group to handle Bethlehem business, consisting of Edward B. Smith & Co., Brown Harriman, First Boston and J. & W. Seligman, all of which firms then included persons who had been associated with Swan in handling Bethlehem business at the Guaranty. Government counsel claim that it was at this conference that Swan invented the "successorship" term of the conspiracy; but I place no stock in that.

  The group worked for some time shaping up the issue but ran into difficulty over the price. The figure they suggested was not acceptable to Eugene Grace, president of Bethlehem, who went to Elisha Walker of Kuhn Loeb.Then followed a variation of the usual Kuhn Loeb formula, and Grace solemnly assured Walker "that there was a complete cessation of conversations with Edward B. Smith & Co.," after which Kuhn Loeb made some changes in the set-up of the issue and was able to meet Grace's price.

  The flexibility of the Kuhn Loeb "show window" policy is worthy of note. It can be manipulated ad infinitum, depending upon the exigencies of the particular occasion, and fits in well with an assumed attitude of standoffishness. That the whole affair is competitive rather than the contrary is plain. Where the business is highly desirable and the opportunity to get it seemingly promising, as in the first stage of the negotiation with the representatives of the Commonwalth of Australia, the very minimum compliance with the "show window" policy is suggested: "are they entirely free from commitments, expressed or implied, towards other bankers." As such commitments are seldom made, an affirmative answer would be easy to give. Where the business is not of high quality, as with Bulgaria, only a "definite agreement for a term of years" will suffice. One is tempted to surmise that sometimes the executives of issuers may not regard some of these requests for assurances too seriously.

  As far as I can make out, the relationship between Grace and the Edward B. Smith & Co. people remained satisfactory and even friendly; the only disagreement was on the subject of price. In any event, Grace seems to have made no objection to taking the Swan group into the syndicate, which came out under the co-management of Kuhn Loeb and Edward B. Smith & Co., with participations of 22.36 apiece, followed by Brown Harriman in second position with 18.18, First Boston in third position with 12.09, and J. & W. Seligman in fourth position with 7.45. The concluding negotiations were all done with Kuhn Loeb, however, and Swan felt that he had lost the business.

  As is so often the case, however, the aftermath is interesting.A memorandum of Burnett Walker of Edward B. Smith & Co., dated May 22, 1935, notes an arrangement with Kuhn Loeb which contemplated co-managership by the two firms, with agreement on certain details, and concludes "the present arrangement as to negotiations, syndication, appearance and inclusion of our associates is to be a precedent for future Bethlehem Steel business." The $55,000,000 issue which is the subject of the above discussion came out on July 2, 1935.

  On August 17, 1936, or over a year later, according to another memorandum by Walker, after much fussing over using the Kuhn Loeb form and type in the advertising, it seemed as though the two firms were about to "get the Bethlehem Steel business set down into a mold." But they were both counting their chickens before they were hatched, as another Burnett Walker memorandum of August 27, 1936, just ten days later, noted an entirely new agreement by which the business was to be split three ways between Kuhn Loeb Edward B. Smith & Co. and Mellon Securities Corporation. The way Mellon Securities had worked its way in is explained in a memorandum by Denton of that firm, dated August 31, 1936. It reads:

  "Recently we learned that this Company proposed to issue the above bonds, and tht the group would be headed by Kuhn Loeb and Edward B. Smith & Co., jointly, as was done in the issue of July, 1935.The matter was immediately taken up with Mr. Grace and Mr. McMath of the Company; and with their assistance, we were able to convince Kuhn Loeb and EBS that we should have a large place in the financing."

  But Mellon Securities was an alleged co-conspirator and had no right to be interfering with "satisfactory relations" of "traditional bankers."

  On September 14, 1936, another $55,000,000 issue of Bethlehem came out with equal participations to Kuhn Loeb, Edward B. Smith and Mellon Securities, all in first position.Later issues in 1937, 1939, 1940 and 1945, were all comanaged by Kuhn Loeb, Edward B. Smith & Co., Smith Barney (Edward B. Smith & Co. having in this period merged with C. D. Barney & Co.) and Mellon Securities. By the time the 1946 and 1949 issues came out Mellon Securities had merged with First Boston, but in some way the Mellon Securities comanagership was lost, and Kuhn Loeb and Smith Barney remained as sole comanagers, despite the fact that the position of Mellon Securities as "traditional banker" should have gone to its "successor," First Boston.

  R. H. Macy & Co.

  Two memoranda in May 1935 show the "show window" policy of Kuhn Loeb in full operation. The first of these is dated May 10, 1935, and is by Felix M. Warburg, Kuhn Loeb partner, at whose home Macy's Percy Straus had dined the evening before the memorandum was dictated.Straus had indicated that Macy's "had given a declaration of independence as far as bankers are concerned." Warburg noted that he "was glad to learn of it" and

  "that, while we were not in a position to go after business which belonged to somebody else, if in connection with their refinancing we could be of any service to them we would be glad to be called in."

  The last paragraph of the memorandum is the most significant:

  "I would not be surprised if he would approach us about this soon."

  Warburg's surmise was correct. On May 13th John M. Schiff of Kuhn Loeb had luncheon at Macy's with Jack Straus, Paul Hollister and Beardsley Ruml, their Treasurer. Straus asked Schiff to step into his office and asked if Warburg "had spoken to me about their finances." The reply was that Warburg had done so, "but, as Lehman Bros. had sold their last issue, we felt that they would probably like to continue that relationship." Straus replied "that they considered they had no bankers" and that, as a matter of fact, he had four or five propositions on his desk at that moment from as many different bankers. Then followed the usual Kuhn Loeb talk about not entering into any competitive situation because there had already been "too much chiseling and stealing business in Wall Street and that we did not countenance such practices." The memorandum continues, "However, if they decided they wished to form a banking connection with us, we would be pleased to listen to him but the suggestion would have to come from them, as we did not wish to put ourselves in the position of soliciting business." There was also some further conversation about the desirability of "a continuing relationship."

  It seems not improbable tht this type of approach, especially in 1935, would be more likely to result in business with Macy's than a display of eagerness to enter into negotiations at once.

  Crucible Steel

  A Buttenwieser memorandum of May 22, 1936 reports a conversation with Wilson and Trost of Stein Bros. & Boyce, intermediaries, who were seeking to interest Kuhn Loeb in some financing of Crucible Steel, and states that Wilson was well acquainted with Wilkinson, Chairman of Crucible Steel. Buttenwieser consulted the manuals, noticed that Chase Harris Forbes and Mellon National Bank had offered an issue of bonds which was to be refunded through the financing mentioned by Wilson and Trost, and he informed these intermediaries that he doubted that Kuhn Loeb would be interested if First Boston, as "successor" to Chase Harris Forbes, and Mellon Securities Company, as "representative of the Mellon Interests," considered this their business. The matter was later discussed over the telephone with Addinsell of First Boston, who advised that "they had had conferences with officials of the Crucible Company through certain officers of the Chase National Bank, with whom the Crucible carries an active account, all with a view to discussing the financing in question, and that they considered themselves in close contact with this business." Accordingly, Wilson and Trost were informed that Kuhn Loeb would not consider the matter further. It is possible that, as suggested by counsel for Kuhn Loeb, the commanding position of Kuhn Loeb in the management of financings of many leading steel compaines in large amounts, made it the better part of wisdom not to take the risk of a rebuff.

  General Cable

  There are two phases of the General Cable situation, reflected in documents introduced against Kuhn Loeb, one in 1940 and another in 1946. The 1946 incident is especially significant as it indicates what had happened to the Kuhn Loeb "show window" policy in the interval between 1933 and 1946, despite the testimony of John M. Schiff, above referred to, to the effect that the firm policy at the time of his deposition just before the trail started was the same as it was in 1933, when Otto H. Kahn gave his testimony before the Subcommittee of the Senate Committee on Banking and Currency.

  The first is a memorandum dated April 25, 1940, by Strauss of Kuhn Loeb. Smith Barney had prepared a plan for General Cable, apparently upon a fee basis, although it is not clear whether the fee was to be absolute or contingent, and this had been done without consulting Kuhn Loeb. The memorandum indicates a protest by Kuhn Loeb based upon the fact that in 1936 there had been, according to the Kuhn Loeb claim, a joint arrangement between the two firms that they should go after the business of General Cable together. There was evidently some misunderstanding about the making of this original arrangement.

  The portion of the memorandum stressed against Kuhn Loeb is the part at the end, where Kuhn Loeb in effect states that, if the situation had been reversed and they had been asked to work out a plan, "we should have considered ourselves obligated to discuss it with Smith Barney & Co." When originally offered it was contended by counsel for the government that this indicated a state of mind on the part of Kuhn Loeb to the effect that if the situation had been reversed Kuhn Loeb would not have competed without getting some sort of "permission" from another co-conspirator. Strangely enough, the same document is referred to in the connecting statements as evidencing a "talking" between the co-conspirators Smith Barney and Kuhn Loeb, "about the obligations which one banker owes to another under the code and nothing else."

  It had nothing to do with any "code", but expressed views quite natural to a "partner," who had entered into an arrangement to go after a particular piece of business, when he learned that the other "partner" had sought to get the business for himself.

  But when we come to glance at the background, it will be found that the transaction reflected in the document is inconsistent with plaintiff's theory of deferring to a "traditional banker." For the "traditional banker" quite plainly was Dillon Read. There had been four issues in the period from November, 1927, through February, 1928, all of which were handled by Dillon Read and Kissell Kinnicutt. If Kuhn Loeb and Smith Barney, or in 1936 Edward B. Smith & Co., formed a group to go after the business of General Cable, this would seem clearly to have been in derogation of the "traditional banker rights" of Dillon Read, nor does there seem to have been any lack of "satisfactory relations" between General Cable and Dillon Read, as, six months after the date of the memorandum under discussion, the company made a private placement through Dillon Read as agent.

  The 1946 situation is also, as well shall see, not only totally at variance with plaintiff's theory of the "rights" of "traditional bankers," but it shows Kuhn Loeb getting right down into the arena and fighting in the open for a piece of business, even though there was a prospect of not getting it and, as the event proved, Kuhn Loeb did not get it.

  Whatever dispute had existed earlier between Kuhn Loeb and Edward B. Smith & Co. had not lasted long, as we not find Kuhn Loeb and Smith Barney working together, and trying to get leadership of a General Cable issue which came out under the management of Blyth on June 11, 1946. The memordanum dated January 29, 1946, is a lengthy one by Buttenwieser of Kuhn Loeb. Blyth, who should have been deferring to Dillon Read as the "traditional banker," had been working on a plan for submission to General Cable and had been careless enough to give an outline of the plan to the Wall Street Journal, which published it on January 10, 1946. Using their personal relations with Roger Straus, president of American Smelting and Refining Company, the parent company of General Cable, there were conversations supposed t lead up to the preparation of a competing Kuhn Loeb-Smith Barney plan, which it was hoped might be more acceptable to the company than the Blyth plan.

  Evidently Strauss of Kuhn Loeb called up Blyth to get information, as is so often the purpose of these telephone calls, and Mitchell of Blyth, at once perceiving that Blyth was faced with some competition, which might get the business away from them, went immediately over to the Kuhn Loeb office where he had a talk with Strauss. Buttenwieser's memorandum states:

  "As I understand it, Mitchell's visit was prompted by LLS telephoning him to discuss the matter in order to learn just how far advanced Blyths were in the picture."

  Mitchell's purpose in calling upon Strauss was the purely competitive one of trying to make it clear to Strauss that Kuhn Loeb and Smith Barney had no chance to get the business and had better quit, because

  "he felt that Blyth had the matter quite well in hand, that they had expended much thought and work on formulating the plan which they had presented to the Company, and, as he put it, that they felt that any effort on our part to formulate a plan would only 'muddy the waters.'"

  The expression "muddy the waters" is the part of the memorandum relied upon by counsel for the government.

  But the reaction of Strauss was quite different from his earlier reaction when a similar dispute arose between him and Swan over Armstrong Cork. Then the "show window" policy was in full force and effect and Strauss followed a cautious course. In 1946, however, he fought the matter out to the bitter end. He thought he had made it "crystal clear to Mr. Mitchell" that the position of Kuhn Loeb and Smith Barney was a strong one, because they had either alone or with Smith Barney "sponsored many offerings of securities for the Smelting Company" and "there was every propriety in our interesting ourselves in the financing of a company in which the Smelting Company had so large an interest as it has in General Cable."

  As a matter of fact, this argument had little weight. Although Kuhn Loeb had brought out an American Smelting issue in 1922, another in 1923 with Guaranty and Bankers, and a third in 1930 with Bankers, Guaranty and Chase the 1932 issue was brought out through Hallgarten, Halsey Stuart and Edward B. Smith & Co. There were also other intervening issues, and the fact was that Kuhn Loeb had not managed any American Smelting securities for ten years, and four such issues had intervened.

  The upshot of the conversation with Mitchell on January 10, 1946, was that things had evidently not been made "crystal clear" to Mitchell, who proceeded to go ahead with the Blyth negotiations. And the same memorandum discloses that Kuhn Loeb also proceeded, with undiminished vigor, to try to sell its plan to General Cable.The matter was taken up with John Loeb of Carl M. Loeb, Rhoades & Co. and it turned out that this firm was actively working on the situation with Mitchell, and they joined in the chorus about "butting in." But Strauss went ahead, nevertheless, talked the matter over again with Roger Straus, showed Straus the Kuhn Loeb-Smith Barney plan and was told by him "not to discuss the matter with any other firm." This led to an embarrassing situation at a luncheon engagement, which had previously been made with John Loeb, at which Strauss tried to avoid discussing the Kuhn Loeb-Smith Barney plan. He finally gave some of the details, but not enough to indicate the full scope of the proposed plan. In any event, on the date of the memorandum, January 29, 1946, Straus informed Strauss that "he and his associates had come to the conclusion that they preferred the Blyth plan." Even this did not cause Strauss to desist, as the memorandum indicates that he pursued the matter further.

  This is supposed to help plaintiff's case because counsel for the government infer that there must have been a "satisfactory relationship" with Blyth or Blyth would not have been so far advanced in the negotiations; and that this is turn would indicate that the preexisting "satisfactory relationship" with Dillon Read had deteriorated. But this is all speculation, in the absence of proof. The significant fact is that Blyth was competing, and not deferring to Dillon Read, the "traditional banker"; and both Kuhn Loeb and Smith Barney, far from deferring to either Dillon Read or Blyth, continued competing for the business to the end. The talk about "muddying the waters" was no more than a competitive effort by Mitchell to get Kuhn Loeb and Smith Barney out of the picture.

  I find that Kuhn Loeb at no time "adhered" to any "practice" of "traditional banker," nor was Kuhn Loeb at any time a party to any conspiracy or agreement on "successorships," nor to any "code" having such or any similar provisions.

  3. Smith Barney (Edward B. Smith & Co.)

  Many issuer situations have already been discussed, including Armstrong Corck,1g Bethlehem Steel,2c the alleged "caretaker" situations, *fn3" General Cable, *fn4" and Sears Roebuck, *fn5" all of which concern Edward B. Smith & Co., and the competitive pattern of Swan and his associates has definitely emerged.

  What Is Now Taking Shape Is Not a Static "Mosaic" of Conspiracy but a Constantly Changing Panorama of Competition Among the Seventeen Defendant Firms

  The "mosaic" is definitely taking on form and substance; but its character is far different from what was predicted with such confidence by government counsel in their Trial Brief on the Facts and in their openings. In fact it is not a "mosaic" at all, but rather a panorama of competitive effort, in which each defendant firm plays its several part; but the policies are constantly shifting and changing as the years go by, and the impact of political events and social changes is felt. That is why it seems so futile to be threshing over the old straw of 1934-1936, or almost twenty years ago. Probably the Otto H. Kahn "show window" policy is now as defunct as the dinosaurs; certainly Smith Barney has long since ceased to study over the available material concerning issuers served by the Guaranty. But we proceed.

  We find Swan, in 1934, in charge at Edward B. Smith & Co.; with the large accession of officers and employees from the guaranty, the staff of the firm had about doubled; and hustling about for business was the order of the day. That Swan's competitive policy was aggressive appears conclusively from the very numerous status book entries in evidence; and it is equally clear that the bulk of the competitive effort, but by no means all of it, was immediately expended upon the business of issuers whose financings had been handled at the Guaranty, by the very men who had just joined Edward B. Smith & Co. That Swan shuld make every effort to establish the firm as the "successor" to this business, previously done at the Guaranty, seems explainable on the fact of the matter. It is significant that the "claims" to this Guaranty business were vigorously opposed by other defendant firms, as we have seen and shall see again. There was no conspiratorial plan about it nor any "invention" by Swan of a "term" of any conspiracy about "successorships." That he also entertained ideas about the desirability of continuing relationships with issuers is simply part of the man's personal point of view. He tells us again and again that he did not believe in wasting his time and the resources of the firm going after business which would almost certainly elude his grasp; but he also felt that continuing relationships with issuers were good for the issuers, as well as for investment bankers and the public in general. This was no conspiratorial camouflage.

  In order to get the discovery proceedings started in a proper way, and as part of the administration of the whole complicated and unwieldy mass which made up the case as a whole, I personally presided over the taking of his deposition; and it is only fair to record the fact that he made a very favorable impression upon me. One of the phases of his testimony which helped me to form this impression, was his statement that the position his firm had in a particular financing was not so important to him as the money they made out of the transaction. In other words, he was in business for profit and not for prestige.

  That there was no "deferring" to "traditional bankers" by Edward B. Smith & Co., and later by Smith Barney, under the guidance of Swan, will sufficiently appear from the discussion of particular issuer situations, when the documents concerning them are all read together. No further reference will be made here to those already commented on or mentioned later on in this opinion. Each of the documents referred to by government counsel, in the connecting statement against Smith Barney, will now be discussed.

  Wilson & co.

  Chronologically, this is the first general issuer situation relied upon by government counsel against Smith Barney. The background shows an issue of $2,500,000 6% Notes in 1927 and a $3,000,000 issue of First Mortgage 6s in 1921, brought out by Guaranty, Hallgarten, Blair, Chase Securities and certain Chicago banks, the latter having minor positions.The outcome of the competition which we are about to consider was a $20,000,000 issue of 4% First Mortgage Bonds, which came out on July 30, 1935, under the joint managership of Field Glore and Edward B. Smith & Co.This was the result of a general scramble for the managership. According to a letter from James D. Cooney, a company adviser to Thomas E. Wilson, president of the company, dated May 23, 1935, the firms competing for the business included Kuhn Loeb, Edward B. Smith & Co., Speyer & Co., Field glore, Lazard, Hallgarten, Hornblower & Weeks, White Weld and Lee Higginson.

  Government counsel, endeavoring to support its "traditional banker" and "successorships" claims, rely upon a statement in a memorandum by Addinsell of First Boston dated May 16, 1935, stating that he had given a favorable response to Swan the day before, when asked by Swan whether he would join Edward B. Smith & Co. "in reconstituting the old group," whereas the memorandum indicated that some time previously, in response to an inquiry from Miles Warner of Byllesby, First Boston had told Warner that "we would not want to be drawn into competition for the business."

  There appears to have been no good reason why Addinsell should think that Byllesby would have been in a position successfully to compete for the business. On the other hand, Swan and his associates in Edward B. Smith & Co. were close to Wilson & Company because of their prior association with the Guaranty, and it must have seemed probable to Addinsell that the reconstitution of the old group would work out well, as it subsequently did.

  Swan testified:

  "* * * Wilson & Company at some time, and I am not clear in my mind at what time, went through a reorganization. In connection with that reorganization I became very close to Wilson & Company. I was either a member of the reorganization committee or a member of one of the protective committees, or I was connected with it in an official capacity. I became very close to Wilson & Company. When various members of the Guaranty Company joined Edward B. Smith & Company, one of the first efforts I made was to try to get Wilson & Company's business, and we did. We realized that it was a highly competitive situation, that there would be many other people trying to get this business, just as we were, and we went after it in the strongest way we possibly could. I was a great friend of, I think, of Mr. Thomas Wilson's, and I made all the effort I could to get this business * *"

  Swan also testified:

  "We used, in trying to get business, we used every resource we could.When we left the Guaranty Co. and went into Edward B. Smith & Company, we went out into a cold world. We had taken on great responsibilities, and we made a great campaign all over this United States to get our names before people who would know who we were and what we were trying to do, and what our capital was, and who the firm was composed of, and we went after every piece of business that we could, and we used such approaches as we could use. Amongst other approaches tht we used, naturally we used as an approach to Wilson & Co., we used not only my acquaintance with Mr. Wilson, but we used our friends in the Guaranty Trust Company to see if they would not tell Wilson & Company tht we were, in this new connection, competent to do this business."

  The Edward B. Smith & Co. status book entries indicate vigorous efforts beginning as early as September 11, 1934, by the Edward B. Smith & Co. people to get the business; and these entries indicate the way in which the old group was reconstituted.

  Swan testifies further:

  "Yes, I do know what is meant by the old group. The old group was the group that handled Wilson & Company business with Guaranty Company: Chase Securities Company, Blair & Company, Hallgarten & Company. The Guaranty Company had gone out of business and certain individuals had gone into Edward B. Smith & Company and they wanted to try and get this Wilson business. They thought that if they got together with the same individuals, the same personalities, that had been in the previous business they would stand a better chance of getting this business. Now, Addinsell was in The First Boston Corporation, I think, by this time, but Chas Securities Company had ceased to exist. But he was known, well known and liked by the Wilson people. I think I may say I way well known and liked by the Wilson people. The Hallgarten people were well known and liked by the Wilson people.So that we tried to get together a group of people that would be persona grata to Wilson & Company and that Wilson & Company would decide should be the people who would handle this business, and we added to that group Glore, Forgan & Company because, from our point of view, from a competitive point of view, we wanted to have a Chicago house in the group with us, and we thought they would add strength to our efforts to get this business."

  M. L. Freeman again appears, this time advising White Weld; and White Weld evidently made some progress, as its name is included in the list submitted by Cooney to Wilson, as above indicated.

  In tne end, the decision was made by the executives of the issuer. The same letter from Cooney to Wilson above referred to states that Buethe, one of the executives, and Freeman (Halstead G.Freeman, a banker advising the company, who later, and on July 6, 1935, became a partner of Field Glore) "definitely recommend that the two houses should be picked out of the last above named three firms, namely, E. B. Smith & Co., Speyer & Co. anf Field Glore & Co." Wilson's calbe in reply reads:

  "Cooney: Letter 23rd -- would use two houses number four and selection between two, three, one -- according present attitude favorable trade -- because of present borrowings am leaning toward all bonds Sailing Thursday Both fine --"

  This meant that Wilson was selecting Field Glore as his number one choice, and the company officials evidently agreed tht the other co-manager should be Edward B. Smith & Co. One of the status book entries notes that Buethe called Swan on June 6, 1935 advising of the decision "to put the matter in our hands jointly with Field Glore."

  Thus, there appears to have been competition for leadership of the issue by a number of the defendant firms, in derogation of the alleged "traditional banker" and "successorships" terms of the conspiracy; and the outcome in no sense reflects any "recognition" of the "successorship" of Edward B. Smith & Co. by First Boston, Field Glore, or anyone else.

  That the competition for underwriting positions was equally keen appears from a memorandum by J. J. Buckley of Edward B. Smith & Co., dated September 9, 1935, which tells the whole story, from the time of a preliminary meeting in the Chicago office of Field Glore on June 10, 1935, down to the time the issue came out. company officials and advisers joined in the discussions; Buethe "specifically excluded White Weld by name," for reasons which we must assume were satisfactory to him, and which went to the merits; and the final list showed Edward B. Smith & Co. and Field Glore, the co-managers, in first position, with $4,500,000 each; Kuhn Loeb in a "non-appearing; position, with $2,000,000; Speyer, First Boston and Hallgarten in second position, with $1,800,000 apiece; followed by Goldman Sachs, Bancamerica-Blair, Lazard, Hornblower & Weeks and Lee Higginson, all in third position, with $720,000 each.

  Rochester Gas & Electric

  A series of documents introduced by government counsel are claimed to have some significance in connection with the "traditional banker" and "successorship" charges, against Smith Barney, First Boston, White Weld and Harris Hall.In my opinion, the whole Rochester Gas & Electric situation has received much more attention in the case than it deserves. While the documents, in the aggregate, do not give us as clear a view of the netotiations from beginning to end as we find in many of the others, which have already been discussed, there is sufficient to indicate that there was no "adherence" to any "practice" of "traditional banker," nor to any "term" of an agreement relative to "successorships."

  In the pre-Securities Act period, the last financing for the company had been an issue of bonds offered on August 18, 1932, with Chase Harris Forbes and Guaranty as the only underwriters in privity of contract with the issuer. Accordingly, as the leading personnel of these two firms had gone over to First Boston and Edward B. Smith & Co. after the effective date of the Glass-Steagall Act, the Edward B. Smith & Co. status book entries show First Boston and Edward B. Smith & Co. joining together as early as October 3, 1934, to go after any business of Rochester Gas & Electric which might eventuate. Looking ahead, we find that the negotiations, which are about to be related, were ineffectual, as the next issue of the company was $4,000,000 of 4% General Mortgage Bonds issued in December 1935, without using the services of any investment banker. Later on, there were two simultaneous issues of preferred stock brought out on September 29, 1936, under the leadership of First Boston; one of these First Boston underwrote alone and in the other Edward B. Smith & Co. had an equal participation but was not a co-manager.

  The first development in 1934, which is stressed by government counsel, was a call on First Boston by Miller of White Weld in which he stated that he had discussed the possibility of refunding an issue of 5 1/2s with an issue of $4,000,000 4% Bonds. He added, and this is the part especially relied on:

  "He was advised [by the president of Rochester Gas & Electric] that the Company had no obligation to do business with any of the banking firms which handled the Company's financing in the past and that the possibility of refunding the 5 1/2s was very interesting."

  None of the documents disclose the reason for Miller's communicating with First Boston; nor does it appear that the statement, which had evidently been made by the president of Rochester Gas & Electric to Miller, was in response to any request for such an "assurance" by Miller. The White Weld background makes it seem improbable that the statement was other than volunteered by the president of the company.

  The reaction of government counsel to this initial competitive effort by White Weld is interesting. By the terms of the alleged conspiracy White Weld should not have been competing, but should rather have deferred to First Boston and Edward B. Smith & Co. as the "successors" to the "traditional bankers." I inquired as to whether or not the statement by the president of Rochester Gas & Electric indicated that the "satisfactory relation" between the company and its bankers had ceased to exist, as the question of whether or not later developments would fit into the alleged conspiratorial pattern, depended somewhat upon the existence or non-existence of "satisfactory relation." The answer by government counsel, however, was "yes and no," and he added "There is some doubt * * * as to whether White Weld's information was correct or not."

  The conversation at First Boston occurred on November 30, 1934.

  As often happens when an investment banker sees chance that a competitor will get business that he is after, we find an immdiate reaction on the part of First Boston and Edward B. Smith & Co. Their most likely contact with the company was through a director, Raymond N. Ball, president of Lincoln-Alliance Bank and Trust Co. of Rochester, to whom letters were sent urging the "claims" of First Boston and Edward B. Smith & Co. on the grounds that "it was * * * felt that the directors of the Corporation would recognize a moral obligation to continue the mutually satisfactory relationship which has been enjoyed over such a long period of years"; and there are further statements to the effect that First Boston was "the successor to the business of Harris, Forbes & Company" and that Edward B. Smith & Co. "as a practical matter has succeeded to the business of the Guaranty Company of New York." I interpret this as no more than a legitimate attempt on the part of First Boston and Edward B. Smith & Co. to go after business which they had agreed to seek together, and to advance such arguments as they could, based upon their prior relationship with the business. that the "claim" is addressed to the issuer is perhaps of some significance; and the fact that, according to another memorandum, First Boston and Edward B. Smith & co. planned to inform White Weld that they considered Rochester Gas & Electric to be their business and were writing to Ball about it, seems no more than a competitive maneuver to get rid of White Weld, if they could

  Before a reply was received from Ball, and sometime between December 3rd and about December 11th, there was a conversation between Addinsell of First Boston and cliff Miller of White Weld. The subject of the discussion had to do with what participation would be given to White Weld if First Boston and Edward B. Smith & Co. got the business. No conclusion was arrived at, but the tenor of a memorandum by Webb Wilson of Edward B. Smith & Co. is that "addinsell and Walker decided that they would rather lose this business than open the doors for White Weld just because they had talked to the President who said his Company had no commitment to bankers."

  This leads up to the concluding portion of the same Webb Wilson memorandum, which is strongly relied upon by government counsel. It follows:

  "Shortly after Addinsell had talked with Cliff Miller, Addinsell discussed the matter with Ben Clark and Faris Russell of White Weld, who apparently had not previously understood the historical basis for First Boston and ourselves feeling that Rochester Gas & electric financing should be our business.When that historical basis was explained to them, Clark and Russell agreed with Addinsell that White Weld obviously had no basis for feeling that they were entitled to be invited into the account."

  If this refers to giving White Weld a participation, which in my view is the only interpretation consistent with the attendant circumstances and the balance of the memorandum, the document is without significance, as this interpretation will not support an inference that White Weld agreed to or thereafter did cease to compete for the managership. This was also the view of government counsel when the matter was first discussed in the connecting statements. Later on, however, a different view was taken, and counsel stated "we at least lean to the view that this language probably concerns managership." With this I disagree.

  There is no evidence as to what White Weld did or did not do thereafter.

  While all this was going on, one of the Edward B. Smith & Co. status book entries under date of August 22, 1935, states: "Blyth & Co. competing and Paterson has been to Rochester."

  The final phase of the Rochester Gas & Electric situation is a Harris Hall letter addressed to Woods of First Boston on September 24, 1934, just before the 1936 issues came out, calling attention to "our joint interests in Rochester Gas and Electric Company business which goes back into the grass roots of both the utility company and the Harris Organization." While the letter speaks of seeking the aid of First Boston by trying to make sure that First Boston "felt that our interests had been protected," the letter does no more than advance a "claim" based on former association with the business. No participation was forthcoming, perhaps because of delay in sending the letter; but in the 1937 issue, co-managed by First Boston and Edward B. Smith & Co., Harris Hall is in second position with 13.33% participation with Goldman Sachs and Langley.

  The net result of all the above is rather against than for plaintiff, as several defendant firms are competing for business which supposedly belonged to other defendant firms as "traditional bankers," on the basis of "successorship"; but the proof is so sketchy as to amount to comparatively little one way or another. I refer to it only because it has been emphasized again and again by government counsel in the connecting statements.

  A. E. Staley Manufacturing Co.

  Three documents received against Smith Barney, and relating to the above issuer, are referred to in the connecting statement as some evidence of "adherence" by Smith Barney to the "practice" of "traditional banker" and "successorships"; and a few additional documents on "successorships" merely disclose Swan and those working with him, advancing every argument they can to capitalize on the former connection of Swan and his associates with issuers whose financings had been handled by the Guaranty.

  In the pre-Security Act period Blair and Stifel Nicolaus had brought out a $6,000,000 issue of 6% First Mortgage Bonds in connection with which the company had signed an agreements, giving these two non-defendant firms "preferential rights" on future financing. The references in the status book entries such as, "Staley advises he had cleared that they are under no obligation to Stifel Nicholaus (sic) & Co.," and "he had advised old bankers that he was dealing elsewhere, but there was no evidence that old bankers were content with such an arrangement," and more to the same effect, have no reference to any suggestion emanating from Edward B. Smith & Co. or from First Boston, but reflect Staley's efforts, entirely on his own initiative, to extricate himself from a difficult situation; he having decided, again without receiving any suggestion from anyone else, that he did not want to do business with his former bankers.

  Accordingly the scene opens with Staley, through some contact at the Guaranty Trust Company of New York, meeting and conferring with Swan on May 13, 1936. He had a conference at the office of Edward B. Smith & Co. on the following day and talked with Swan, Cutler and Buckley, all of Edward B. Smith & Co., whom he informed that he had discussed the matter of financing with First boston. Neither Edward B. Smith & Co. nor First boston was willing to expend the necessary time and money connected with a study of the affairs of the company and the formulation of a plan, on the basis of competing with one another. There was the difficulty of the "preferential rights" contract with Blair and Stifel Nicolaus and, as a purely business proposition, the decision, that Edward B. Smith & Co. and First Boston should work jointly on the matter, seems sensible, especially as the suggestion that they do so may have come from Staley.

  In any event, the balance of the status book entries indicate prolonged negotiation and considerable work on the formulation of the plan and the preparation of the registration statement. Since this was the first post-Securities Act issue for this company, the work involved was necessarily much greater than it would have been had there been a previous issue registered under the Securities Act. After considerable hesitation and dickering, Blair and Stifel Nicolaus finally signed an agreement cancelling the "preferential rights" contract, and the issue came out on February 14, 1936 under the sole management of Edware B. Smith & Co. There were only four underwriters: Edward B. Smith & Co. in first position with $1,500,000; First Boston in second position with $1,100,000; and Bancamerica-Blair and Stifel Nicolaus with $700,000 apiece.

  In 1940 there was a $1,700,000 private placement without the services of any investment banker; in 1941 Smith Barney alone handled two simultaneous registered secondary issues of common and preferred stock; and there were two simultaneous offerings of preferred stock in 1946 brought out by First Boston and Smith Barney as co-managers.

  In connection with this last issue, there is testimony by Gordon of Kidder Peabody tht Kidder Peabody had solicited this business, and that in May 1945, Kidder Peabody submitted a competing plan for what turned out to be the 1946 issue, despite the fact that he knew that prior financing had been done by Edward B. Smith & Co. and First boston.

  Aluminum, Koppers, Jones & Laughlin, Long Star Gas, Gulf Oil

  A memorandum of September 19, 1935 by Weisheit of Edward B. Smith & Co. reads:

  "Mr. C. S. Cheston has asked tht we do not pursue directly any Mellon business such as Aluminum, Koppers, Jones & Laughlin, Lone Star Gas, Gulf Oil, etc. as the Mellon Securities Company is planning to handle these accounts themselves and our contact work in such cases should be only with Mellon Securities Company through Mr. Cheston."

  Evidently government counsel thought Cheston was connected with Mellon Securities, but the fact that he turned out to be a Philadelphia partner of Edward B. Smith & Co. and had no connection with Mellon Securities, did not deter government counsel from emphasizing this document in the connecting statement relative to Smith Barney, where the exhibit is cited as an example of refusal to compete "without clearance from the banker who had previously been financing" the issuer.

  There could not be any "traditional banker" situation involved, as Mellon Securities was organized on February 11, 1931, and had no alleged "predecessor." It had never managed any financings for any of the companies referred to in the memorandum, and no theory is suggested which could make Mellon Securities the "traditional banker" of any of them.

  From the static data Edward B. Smith & Co., as "successor" to the Guaranty, should have been the "traditional banker" for the Aluminum Company of America, Jones & Laughlin Steel Corporation and Lone Star Gas Corporation, and blyth or Brown Harriman and not Mellon Securities should have been "traditional banker" for Gulf Oil.

  The explanation very simply is that, against prospective competition from Mellon Securities, it was thought as a matter of business judgment that Edward B. Smith & Co. should attempt through the efforts of Cheston to get a participation rather than to seek the management of financing by these companies. The document has nothing to do with getting clearance from any "traditional banker."

  Southern Pacific

  A series of four status book entries beginning July 17, 1935 and ending June 10, 1936, relating to Southern Pacific require no more than passing reference. Kuhn Loeb had been the only investment banker listed as in privity of contract with this issuer for five successive issues in the pre-Securities Act period.

  Swan attended an executive committee meeting of the New York Botanical Association on July 17, 1935, where he met Henry De Forest. After the meeting "they discussed business to some extent and the matter of Southern Pacific financing came up." The entry of this date continues: "* * * Mr. De Forest said that the road was not considering any financing now, and went on to say that owing to the changes in the personnel of their old banking firm (KL & Co) he did not consider the railroad had any banking connection at present. This brings up a very interesting situation and one which should be followed carefully."

  On the government's original "traditional banker" theory Swan should have deferred to Kuhn Loeb and kept away from the business; on the revised theory of "satisfactory relations," it might be claimed that there was some basis for considering that there was no longer any "satisfactory relation" between Kuhn Loeb and Southern Pacific, in which event Swan would not be required by the terms of the alleged conspiracy to defer. Whether the situation be looked at from one angle or another, other documents in the case show that Edward B. Smith & Co. followed the Southern Pacific situation with great care, until a news item in the New York Times on June 4, 1936 announced that "a banking group, understood to be headed by Kuhn, Loeb & Co." was expected to handle a forthcoming issue of $50,000,000 to $60,000,000 notes of Southern Pacific.

  Then comes the entry especially relied on, under the same date, June 4, 1936:

  "Spoke to JWC about rumored financing and he said in view of company's past relations with K. L. & Co. he did not think we could properly approach the company in spite of Mr. DeForest's statement above."

  Six days later, on June 10, 1936, a $60,000,000 issue of Southern Pacific bonds came out under the management of Kuhn Loeb, and Edward B. Smith & Co. did not even participate in the offering.

  Standard Oil of New Jersey

  A letter from Land of Edward B. Smith & Co., dated November 6, 1936, to Gallegher of Standard Oil of New Jersey, has no background to support it and seems to be merely an angling for some natural gas secondaries. The sentence relied on is "I should like to add, however, that we do not wish to be construed as soliciting any business in which Morgan Stanley & Co. would be interested." Perhaps Land hoped that the letter might find its way to Morgan Stanley and help Edward B. Smith & Co. to improve its position in some of the participations in issues brought out by Morgan Stanley. There is no reason to doubt that Land was interested in the second aries; and the document would seem to lend little support to the "traditional banker" charge.

  The contrast to the proof adduced against Kuhn Loeb is striking. As we proceed, we shall find that there is little or nothing of significance against the other defendants on the "traditional banker" issue.

  I find that Smith Barney (Edward B. Smith & Co.) at no time "adhered" to any "practice" of "traditional banker," nor was Smith Barney (Edward B. Smith & co.) a party to any conspiracy or agreement on "successorships," nor to any "code" having such or any similar provisions.

  4. Lehman Brothers

  From what we have already observed of the energetic competitive practices of Lehman Brothers in connection with the discussion of several issuer situations under directorships,1h the paucity of evidence against that firm on the "traditional banker" and "successorships" phase of the case need cause no surprise.

  The few documents referred to in the connecting statement by government counsel will be commented on in the order there presented.

  Crown Zellerbach

  In the pre-Securities Act period Blyth had offered the five most recent public offerings of securities of Crown Willamette Paper Company, Zellerbach Corporation and Crown Zellerbach Corporation, all part of the same organization located on the West Coast.

  Lehman Brothers heard there was some financing under consideration, and decided to go after it, despite the fact that Blyth was the "traditional banker" and Charles R. Blyth was a director. Accordingly, M. F. Hellman, a Lehman Brothers employee, made the trip to San Francisco and obtained an introduction to J. D. Zellerbach, having been informed by Lipman, president of the Wells Fargo Bank, who was advising Hellman, to "go over and speak to Mr. Zellerbach, laying my cards on the table, and ask for his advice."

  The report of this conversation, made by Hellman on July 22, 1935, affords government counsel a few short quotations on the subject of the submission of competing bids, but the net result is a fine piece of shrewd negotiation by both Hellman and Zellerbach, reminiscent of others previously discussed in this opinion. Zellerbach, on the one hand, very plainly stated that he and Mills, a member of the Finance Committee, "were the closest friends to Charles Blyth" but that "if we made the best proposition the Finance Committee would accept our proposition with the proviso that we agreed to take Blyth & Co. and some other firms into the deal." It was plain that there was no lack of "satisfactory relations" between Crown Zellerbach and Blyth.

  The conversation covered quite a range of subjects, each negotiator sounding the other out. If Lehman Brothers made the lowest bid it would get the business; "Blyth could raise as much hell as he wanted and it would not do him any good"; Lehman Brothers had better not approach Blyth to make a joint proposition for, if Lehman Brothers felt it had to do that, "we might as well forget the whole thing." If Lehman Brothers did not make the best proposition, there was no assurance that it would even be taken into the deal, as Zellerbach could not "take care of all the banking houses who offered him some kind of a proposition which was not acceptable."

  The upshot was that Hellman recommended that Lehman Brothers make a proposition. Two elaborate alternative plans were prepared and later submitted to Zellerbach by Hellman; and in connection with these the usual caution was observed as to exact prices, so that their plans might not be taken over by someone else, at what seemed a lower price, but which amounted to "the same basis as our original price."

  After all this trouble Zellerbach was non-committal; and there was no Crown Zellerbach financing for another ten years.

  Thus we find Lehman Brothers, in flat defiance of the alleged "practice" of "traditional banker," not only making the initial competitive approach, but persisting in the formulation and submission of elaborate plans, after being assured that the relations with Blyth were intimate and friendly.

  Giannini Interests

  The claims advanced by government counsel based upon a letter of July 3, 1943, from Hammerslough of Lehman Brothers to Francis Callary of Consolidated Vultee Aircraft Corp. in California, are wholly unsupported by evidence and require no comment.There had evidently been some misunderstanding between Lehman Brothers and Eastman Dillon, the nature of which is not clear. In the absence of evidence of attendant circumstances, it is not possible to understand what the letter is about.

  The So-Called "Treaties" Between Lehman Brothers and Goldman Sachs

  As background to the discussion of the claims of government counsel relative to a letter from Robert Lehman of Lehman Brothers to Thomas H. McInnerney of National Dairy Products Corporation, dated February 18, 1936, it seems necessary briefly to comment on the dispute between Lehman Brothers and Goldman Sachs which led up to the writing of that letter.

  It will be recalled that, commencing with the underwriting of the United Cigar Manufacturers preferred and common stocks in June, 1906, Lehman Brothers conducted its business of heading security issues in an informal partnership with Goldman Sachs which lasted for nearly 20 years and was nevery reduced to writing.1i

  From 1906 to 1924, the two firms were, in effect, a single partnership as to the heading of security issues, and neither one had a separate business in the heading of security issues.2d During the period 1906-1924, Lehman Brothers headed in partnership with Goldman Sachs 114 negotiated issues for 56 issuers.

  In view of the very aggressive competitive policies of each of these firms which we have already had occasion to observe, it was inevitable, or so at least it seems to me, that they should eventually come to a parting of the ways. Disputes gradually developed between the two firms over a division of the profits arising from financings which they handled together as partners. In one instance after another, work done by the partners or employees of one firm, either in getting or holding on to the business of a particular issuer, or in servicing the accounts, seemed greater than that done by the partners and employees of the other.

  In any event, the storm clouds gradually gathered, and, as a result, after Lehman Brothers and Goldman Sachs had thus headed together 114 negotiated issues in their joint venture, sharing equally as partners in both risk obligation and profit participation, the two firms during the years 1925-1926 gradually worked apart, and during this period each firm headed new issues without the other.

  The altered relationship of the two firms is reflected in two memoranda, dated October 26, 1925, and January 5, 1926, which together with a later memorandum, dated June 30, 1938, were called "treaties" by government counsel.The first of these memoranda, dated October 26, 1925, described a conference between representatives of the two firms, and noted that "The conference throughout was marked by a temperate and amicable spirit." The 1925 and 1926 memoranda in essence recognized the dissolution of the partnership as to the business of new issuers, and provided for the relation of the firms to each other, as to the future business of those issuers whom they had served in the past as partners. As to the business of new issuers, each firm was henceforth free to pursue its own course independently of the other. With respect to any new financing that might arise in any company for which they had already in the past handled financing together as partners, the two firms were to operate on the same basis as before. The memorandum of January 5, 1926, made detailed provisions as to how the two firms would handle such financings in the future, and attached to the memorandum was a list of the issuers, segregated according to the firm which would handle the books if any such business arose. Sixty corporations, counting the separately named subsidiaries, were listed; 41 in connection with whose financings the books were to be handled in the office of Goldman Sachs, and 19 in connection with whose financings the books were to be handled in the office of Lehman Brothers.

  While it is contended by government counsel that these memoranda represent "something superimposed on the general conspiracy," I find in them nothing to support this contention. They represent a serious effort on the part of both firms to compose their differences and to hold on to their business.It would unduly lengthen this opinion to attempt any detailed discussion of the various provisions of these so-called "treaties."

  The enactment of the securities legislation in the years 1933-1934, resulted in vastly increased work and expense on the part of the managing underwriter in connection with the registration of securities to be publicly offered.Inevitably, the managing underwriter who handled the books on an issue came increasingly to regard any management fee as largely compensation for its own greatly increased expenditure of time and money. The division of the management fees, which arose from financings headed by Lehman Brothers and Goldman Sachs, became a subject of controversy between these two firms. No provision for the division of management costs and fees had been made in the memoranda of October 26, 1925, and January 5, 1926.This led to an exchange of letters on February 6 and 7, 1936, discontinuing the arrangements for handling the old partnership accounts set out in the memoranda of October 26, 1925, and January 5, 1926. The separation between the two firms was now complete.

  The discontinuance of these arrangements, which had previously governed the duties of each firm toward the other with respect to issuers whom they had served in the past as partners, gave rise to a bitter strife between the two firms, which, by involving the issuers, threatened the interests of both firms, made less effective the competition of each firm against the rest of the field, and resulted in the loss of considerable business.

  A new memorandum, dated June 30, 1938, which took account of the problems arising out of the disputed management fees, was agreed on. Of the 60 corporations which were listed in the memorandum of January 5, 1926, only 42 appear in the memorandum of June 30, 1938, and no new companies are listed. The 42 companies are divided on the basis of the share which each of the two firms would have in the management fee, if they were able to obtain the management of new issues of the companies in the future. As before, the memorandum contemplated that future issue would be primarily handled in the office of one of the two firms, and the companies were listed under the name of the firm which would bear the burden of the work, if the financing was obtained. the memorandum contained many other detailed provisions governing the duties of each firm toward the other with respect to future hoped-for issues of the 42 listed companies.

  I find nothing in these agreements to support the government's claim of an over-all, integrated conspiracy and combination, as there is no evidence that any of the other defendant firms were parties to the arrangements between Lehman Brothers and Goldman Sachs, or that they knew of the existence of these memoranda. The complete independence of the issuer corporations from the two firms was expressly recognized by the two firms in the memoranda of January 5, 1926, and June 30, 1938; and, in fact, the issuer corporations were not, so far as I can see, restrained by virtue of the relationship between the two firms, in the selection of either investment bankers or methods of financing. Nor do the memoranda in any way support the existence of any alleged "code."

  National Dairy Products

  During the interval of two years when the two firms went their several ways alone, Goldman Sachs succeeded in persuading National Dairy Products to come into the Goldman Sachs camp. The letter to McInnerney of February 18, 1936, above referred to, is reminiscent of the cries of anguish by Hancock of Lehman Brothers in 1937, which have already been noted in connection with Cluett Peabody.1j Robert Lehman tenders his resignation as a director of National Dairy Products, and goes on to protest the action of the company in going along with Goldman Sachs, which firm is attacked vigorously on the ground of its "clear violation of a written agreement dated January 5, 1926," and he accuses the company of "taking sides in the dispute between Goldman Sachs & Co. and ourselves," and not acting "fairly," unless National Dairy Products decides to change its mind, despite the fact that Robert Lehman had already been told by McInnerney "that this matter has gone so far that it cannot be and should not be reopened."

  Neither the letter nor the series of agreements between Lehman Brothers and Goldman Sachs, when read against the background of the other documents and the deposition testimony, demonstrate and "adherence" to the alleged "practice" of "traditional banker" or "successorships."

  Butler Bros., Associated Gas & Electric, Indianapolis Power & Light and Tidewater Associated Oil

  Miscellaneous documents referring to the above-named issuers are described in the connecting statement against Lehman Brothers as evidencing additional "treaties," showing a disposition by Lehman Brothers "to combine rather than to compete." Note of them, when read in context with other documents in evidence and with the testimony taken by deposition, support the charge that Lehman Brothers "adhered" to any "practice" of "traditional banker" or "successorships."

  Three documents relative to Butler Bros. supply quotations such as "use your influence to make Cunningham [of Butler Bros.] stop shopping and concentrate negotiations with Lehman," and "have talked to Cunninghman like a father about mistake in shopping his business." But no alleged "traditional banker" situation was involved. Lehman Brothers, together with Blyth and Laurence Stern, had formed a nucleus group to go after some Butler Bros. financing, and the telegram from Mitchell to Stevens, both of Blyth, on April 15, 1935, and Stevens' reply of the following day, with copies to Lehman Brothers, disclose competitive efforts to get Cunningham in to talk business. These efforts proved of no avail, as the group lost out.

  A single Lehman Brothers memorandum of January 25, 1937, "with respect to all future financing for Associated Gas & electric or its subsidiaries," is commented on, in complete disregard of the half dozen or so other documents and the deposition testimony of Gutman, which supply the background necessary to understand the subject matter of the memorandum. When viewed in that setting, it turns out that the wording of the memorandum was inadvertently misleading, as it was the understanding of First Boston that Lehman Brothers would come in as co-manager only if the company made a request that they do so "in the light of circumstances and conditions existing at the time." In other words, there was no such "treaty"; and, even if there had been, its contribution to the "traditional banker" phase of the case would seem to be minimal.

  There are many documents in evidence relating to Indianapolis Power & Light. In my view of the case the position of government counsel is based upon a series of erroneous inferences from the documents and deposition evidence taken as a whole.Neither the single document relied upon in the connecting statement against Lehman Brothers, nor all the documents taken together, give support to the "traditional banker" charge. Under these circumstances I have decided to pass it over without extended comment.1k

  However, in connection with "successorships," government counsel assert that, when the 1938 issue of Indianapolis Power & Light was under consideration, Lehman Brothers, who succeeded in getting the leadership of the issue, "recognized" the "successorship" of Harris Hall to an alleged "historical position" of its "predecessor," N. W. Harris & Co. Harris Hall had competed for the managership of the 1938 issue and hoped to get a participation as an underwriter. After setting forth its "claim" in a previous letter, which was not offered, Edward B. Hall evidently thought up some additional arguments. Accordingly, on June 15, 1938, he wrote to Lehman Brothers and stated "I neglected to mention our historical connection with the financing of some of those properties." He went on to mention the fact that at the time of the formation of the Merchants Heat & Light Company in 1912 "our house acted as its principal investment banker in connection with the purchase and distribution of its First Mortgage Bonds."

  Lehman Brothers had never headed any previous issue of Indianapolis Power & Light securities, and from the mere fact that Harris Hall was given a small underwriting participation of 1.80% in the forthcoming issue, I do not see how I would be justified in finding that there was any "recognition" of "successorship." There is every reason to suppose that this belated and fanciful "claim" had nothing whatever to do with the matter, especially in view of the recent competition of Harris Hall for the managership of the issue.

  The final document referred to in the connecting statement against Lehman Brothers is a memorandum of June 21, 1945, formalizing the mechanical procedures of Kuhn Loeb and Lehman Brothers, as to the position of the names in the advertising, the running of the books and similar matters in connection with future issues of Tidewater Associated Oil. The two firms had co-managed Tidewater Associated Oil financings in 1937, and four additional issues between August, 1940 and April, 1945. Perhaps government counsel had not noticed this.

  This is the last time I shall note such odds and ends, although much of the evidence relied upon in support of plaintiff's case against the remaining defendant firms on the issues of "traditional banker" and "successorships" is of this general character.

  I find that Lehman Brothers at no time "adhered" to any "practice" of "traditional banker," nor was Lehman Brothers a party to any conspiracy or agreement on "successorships," nor to any "code" having such or any similar provisions.

  5. Glore Forgan

  The competitive pattern of glore Forgan throughout the entire period under examination in this case is clear. When Marshall Field III retired from the firm on July 6, 1935, and withdrew his capital and the prestige of his name, Glore Forgan virtually started business all over again. We have had some glimpses of Glore Forgan's competitive efforts, competely at variance with the alleged conspiratorial scheme, in the Wilson & Co. and Chicago Union Station issuer situations, which have already been commented on.1l The record abounds with other instances, some of which will be hereinafter discussed, in connection with the case presented against other defendants.

  It is worthy of note that of the large number of plaintiff's exhibits received in evidence, only 9 were offered against Glore Forgan. Five of these relate to Chicago Union Station; one is a purely formal exhibit received against several defendants, including glore Forgan, "to show how records are kept" with reference to some phase of syndication; one is a letter from John F. Fennelly, one of the partners, to the SEC, in which he wrote, "I am opposed to the theory of compulsory competitive bidding, but it seems to me particularly unsound if the theory is applied to second-grade securities and equities"; and the last two concern Indianapolis Power & Light, previously discussed,2e to which we shall now return.

  Indianapolis Power & Light

  It will be recalled that on August 5, 1938, a $32,000,000 issue of First Mortgage Bonds came out under the sole management of Lehman Brothers. In 1937 and at least until some time in the early spring of 1938, when Charles True Adams was appointed trustee in reorganization of the parent company, Utilities Power & Light Co., negotiations for financings of Indianapolis Power & Light had been handled by its own executives. The last prior issue was one of $8,000,000 of Bonds in August, 1930, with Blyth and Chase Securities in privity of contract with the issuer. On plaintiff's theory this would make Blyth and First Boston the "traditional bankers."

  Glore Forgan seems to have paid no attention to the "traditional bankers," however, but competed in 1937 for the financing which, as it turned out, did not materialize until August 5, 1938.Glore Forgan learned from Pritchard, president of the company, that "Lehman Brothers had been awarded the leadership of this financing"; this was in July 1937, as indicated by another document after which Glore Forgan joined the Lehman Brothers group "for this specific piece of business." Having joined the group it seems to me that Glore Forgan was at least under a moral duty to stay with the group and not yield to any tempatation to try thereafter to get the business for itself.

  But government counsel think otherwise. There is a letter from Fennelly to Glore, dated May 24, 1938, which must refer to a time very shortly after Adams was appointed trustee in reorganization of Utilities Power & Light, stating that "some weeks ago" Adams had approached Glore Forgan and "he told us that he would like to have us head up the financing of Indianapolis Power & Light." In view of the prior commitment to Lehman Brothers, it is far from certain that Glore Forgan would have led the issue, even if they had followed up Adams' suggestion. In any event, I do not see how they could have done otherwise than say they were obligated to the Lehman Brothers' group, which is what they did. Despite all this, government counsel claim Glore Forgan "deferred" to Lehman Brothers. And the most curious paart of all this is that the "traditional bankers" were Blyth and First Boston, who seem to have been totally ignored by both Glore Forgan and Lehman Brothers.

  The same letter also indicates that "more recently," Adams suggested an attempt to make some joint managership arrangement with Lehman Brothers, and Fennelly seems to have toyed with the idea of making this proposition to Lehman Brothers, and if they refused, going after the business himself, after an interval. To his credit it may be said that he let this idea drop, and Glore Forgan was one of the Lehman Brothers' underwriters, in second position with First Boston and Halsey Stuart, when the issue came out.

  The record discloses no deferring by Glore Forgan to any other investment banking house, nor any suggestion that any ther firm defer to it. Nor is there any substantial evidence to indicate that Glore Forgan "recognized" any other firms as "successor" to any of the institutions which had, prior to the effective date of the Glass-Steagall Act, engaged in investment banking and had later given it up.

  No document offered against Glore Forgan contributes in the slightest degree to any "mosaic" of conspiratorial plans and operations; and it is difficult to understand why this Chicago firm was joined as a defendant in the case. As we proceed we shall find other defendants against whom there is also a conspicuous lack of evidence.

  6. Kidder Peabody

  The statement of the history and development of this firm in Part II of this opinion indicates that Kidder Peabody started from scratch in 1931, greatly expanded its personnel and facilities after the Glass-Steagall Act took effect, and, as the result of an aggressive competitive policy, which included efforts to obtain leadership, participations and even selling positions in every sort of investment banking business, large and small, including private placements and competitive bidding accounts in large volume, forged its way, strictly on the merits, from a minor position in 1931 to that of one of the country's leading underwriters, with many offices and a large staff, at the time of the filing of the complaint.

  The record is replete with examples of competition by Kidder Peabody, during the entire period from its organization in 1931 down to the time the action was commenced, all in derogation of the alleged "practice" of "traditional banker," and the existence of a "code" relative thereto. Some of the situations principally relied on by government counsel, but which in fact disprove the existence of the alleged conspiracy, have already been commented on, including Burlington Mills,1m Wilson & Co., Staley,2f and Armstrong Cork.3a

  Others referred to in the connecting statements and the briefs of government counsel as against Kidder Peabody, on the "traditional banker" and "successorships" issues, will now be discussed to the extent deemed necessary.

  The "successorships" phase of the case has already been so fully developed that little need be added. After a few short references to certain documents received against Kidder Peabody, the subject will not be further commented on in the portion of this Part V of the opinion concerning other defendants. There was no joint action or agreement or concert of action by the seventeen defendant firms or any smaller group on the subject of "successorships." In the hustling for business, amidst the chaotic and confusing conditions which inevitably followed the Glass-Steagall Act, dislocated personnel, scattered here and there, in groups or individually, made desperate efforts to recapture or reestablish whatever relationship they had with business which they had personnally conducted in the institutions where they had worked for years and from which they had been forcibly separated by the operation of the new law. These men had not merely been forced to live on short rations during the great depression; they were fighting for their very livelihood, and there were many who struggled in vain. As groups and as individuals they used every argument they could think of to hold on to business which they considered was theirs, in the same sense, and no other, as would have been the case of men who left a real estate or insurance office, which had been liquidated and closed, forcing them to seek employment elsewhere.The customers or clients or whatever they may be called were theirs because they as individuals had rendered the service upon which the relationship, which varied in the different situations, between the customer or client and the company where they had formerly been employed, was based.In some cases, such as Chase Harris Forbes and Harris Trust and Savings Bank, the nature of the arrangements made with First Boston and Harris Hall gave some plausibility to a "claim" of "successorship," but in no case was it seriously asserted that the relationship, which had formerly existed between the issuer and the banking institutions which managed its security issues, was something permanent and fixed, or which could be or was the subject of formal or informal transfer.

  When the numerous documents bearing on the subject of "successorships" are viewed in the large, it will be found that most of them stress the fact that the individuals in their new employment have such knowledge of the affairs of the issuer, such experience in the distribution of its securities, and such skill and competence in the business, that they should be selected to manage or participate in new issues by the same company. It does not seem strange to me that the numerous arguments made on the subject should include such words as "successors," and "inheritance," even with respect to underwriting positions, because the element of service and familiarity with prior management or distribution problems is present alike in both.

  Sometimes the "claims" are exaggerated. Whenever an erroneous statement finds its way, by accident, carelessness or design, into correspondence of office memoranda written by a partner, officer or employee of a defendant banking firm, this is taken by government counsel as positive fact, despite satisfactory and credible evidence to the contrary.There are several instances of this, and the subject comes up again in connection with a letter by Hovey to Baring Brothers of April 25, 1931, and another by G. Hermann Kinnicutt to Dillon Read on April 21, 1939, both men being, at the time of writing the letters, Kidder Peabody partners. They are cited by government counsel on the subject of "successorship" by "inheritance."

  In Hovey's letter to Baring Brothers he states:

  ". . . We have been assured by Messrs. J. P. Morgan & Co. and other houses that we will receive the same participations which Kidder, Peabody & co. have formerly enjoyed in the financing of such corporations as the American Telephone & Telegraph Co., New Haven Railroad, Boston & Maine Railroad, etc."

  But no such assurances had been given, although perhaps Hovey hoped things would work out that way. The testimony of Gordon and Stanley on this subject is convincing and in accordance with the probabilities; and the participation in the Illinois Bell issue of 1935 was allotted to Kidder Peabody by Stanley strictly on the merits. The rather mild excerpt from Gordon's long letter to Western Cartridge Company on November 10, 1939, is of the same variety.

  Pennsylvania Power & Light

  On August 9, 1939, a $95,000,000 issue of First Mortgage Bonds of Pennsylvania Power & Light was brought out under the joint management of Bonbright, Dillon Read, First Boston and Smith Barney. On October 28, 1936, some three years prior to the time the issue came out, Matthews heard a rumor about the proposed financing, and a Kidder Peabody office memorandum of that date indicates that Matthews thought that, despite the fact that Kidder Peabody had not participated in the original Pennsylvania Power & Light Bonds which came out in 1931, a "claim" might be made for the position that the Philadelphia National Company had in the business "in view of the large number of holders of the bonds who are now customers of the Philadelphia office."

  Matthews followed the matter up again later and another Kidder Peabody office memorandum of October 11, 1938, shows that Matthews had been in touch with Cheston of Smith Barney, and had been advised "that they would give Kidder Peabody definite consideration on the basis of this past participation when, as and if the business developed."

  Finally, we come to the letter chiefly relied on by government counsel, which was written by G. Hermann Kinnicutt, a Kidder Peabody partner, to Dillon Read on April 21, 1939.In this letter, after referring to the fact that the Philadelphia National Company had been affected by the Glass-Steagall Act, the letter continues:

  "At that time, Kidder, Peabody & Co. took over the entire business of the Philadelphia National Company, 'lock stock and barrel,' including their offices, their entire personnel and all their accounts."

  There is no evidence that any "accounts" were transferred, and I cannot believe that this statement is more than an inadvertence by Kinnicutt. The whole tenor of the letter indicates that the "claim" is being presented on the merits. It is true that "our past position in the business" is referred to, but the letter concludes:

  "Beyond all this, of course, is the fact that the Kidder, Peabody & Co. of today has made great strides in their distributing organization and I feel that in this particular issue, with our outlet in Pennsylvania, which is the logical market for bonds, we can make a very good showing."

  When the issue came out the four managers were in first position with 5.67; Morgan Stanley, Harriman Ripley and Halsey Stuart were in second position with 4.86; Mellon in third position with 2.84; and Kidder Peabody together with Blyth, White Weld, Union Securities, Langley and Shields in fourth position with 2.43. From what I have learned of the investment banking business and the activities of the various investment banking houses, during the almost three years of this trial, this is exactly where I should expect to find Kidder Peabody strictly on the merits.

  The testimony of Gordon lends no support to the claim of counsel for the government that it was any part of his policy or "practice" to keep away from situaions where there was a "satisfactory relation" between an issuer and an investment banker. Swan, who had much of his experience with the Guaranty, and who had retired from Smith Barney in 1943, personally felt that continuing relations between issuers and investment bankers were a good thing; but there is no trace of this in Gordon's testimony. The whole competitive behavior of Kidder Peabody from first to last belies any such notion. What Gordon testified was:

  "Do you go after every big account in the United States? A.We have neither the time nor the organization which can go after every big account in the United States. It is our policy to study the field to determine which industries are likely to be in need of funds, or which companies can advantageously refund their securities. Having made those studies, we then decide which companies we might be able to successfully solicit. We try to find weaknesses wherever we can. We go after those weaknesses to the best of our ability.If there is time left over from those situations, we get after other situations.

  "One cannot go to a company and say merely it would be nice if you did business with us. It is necessary to develop a program, and to present facts and figures that the company is interested in.The preparation of such facts and figures and terms, the development of terms -- each situation is different -- such development takes a great deal of time, and it would be impossible to solicit every company in the United States. We advertise, we do everything we can to get business. In addition to that, we go after any piece of business we think we have much chance of getting."

  The remaining miscellaneous documents used against Kidder Peabody merit no comment. They are all of the variety which have already been evaluated, in the light of the whole record.

  I find that Kidder Peabody at no time "adhered" to any "practice" of "traditional banker," nor was Kidder Peabody a party to any conspiracy or agreement on "successorships," nor to any "code" having such or any similar terms.

  7. Goldman Sachs

  The evidence taken as a whole, much of which has already been the subject of extended comment, discloses Goldman Sachs pursuing throughout the entire period, from the turn of the century down to the date of the filing of the complaint, a competitive policy which was in every sense of the term aggressive. This firm was at no time a party to any scheme or plan involving deferring to any other investment banking house, or holding off because of "satisfactory relations" between an issuer and any of the defendant firms or any other firm named or not named as an alleged co-conspirator, nor to the "term" of any conspiracy or agreement on "successorships." On the contrary, there are indications that Goldman Sachs even transcended the bounds of reasonable competitive effort in its endeavor to get every piece of business it could possibly secure, within the limits of its personnel and its resources.

  While it is claimed that the testimony of Bogert, of Eastman Dillon, about "upsetting the applecart" applies to all defendants, what he said on his deposition, which will be more closely examined when we come to Eastman Dillon, falls far short of proving any "adherence" by Goldman Sachs, or any of the other defendants, to the alleged "practice" of "traditional banker."

  On this phase of the case the charge against Goldman Sachs, in view of the paucity of other evidence, rests solely upon documents which expose to our view a long series of conversations and negotiations relating to a security issue of Pillsbury Flour Mills. The other miscellaneous documents referred to by government counsel in the connecting statements and in the briefs require no discussion.


  There are no less than 66 documents in evidence relating to Pillsbury. In substance the claim of government counsel is that White Weld "deferred" to Goldman Sachs as the "traditional banker" having "satisfactory relations" with this issuer, as a result of a "policing" operation by Goldman Sachs.This is alleged to be a "classic example" of what "the defendants" habitually do in carrying out the "terms" of the combination and conspiracy. What we shall find is competition by White Weld throughout; not, it is true, competition of the purely selfish variety, but competition in the setting of a close personal relationship, which made sincere helpfulness and the giving of sound advice considerations superior to that of gaining pecuniary advantages to the possible detriment of the interests of an intimate friend. That White Weld's competitive efforts were unavailing was due to unremitting, continuous and effective maneuvers, by Goldman Sachs and its "partner," Lane Piper & Jaffray (later Piper Jaffray & Hopwood) of Minneapolis, to hold on to the business. That the competitive efforts of these two firms were wholly unrestrained will soon appear. There is nothing in the Pillsbury documents which requires conspiracy to explain it; and, if the testimony of Harold B. Clark (described throughout the case as "Ben") is to be credited, the documents describe a condition of affairs inconsistent with the existence of any conspiracy.

  Goldman Sachs and Lane Piper & Jaffray had been in privity with Pillsbury in connection with the last pre-Securities Act financing of this company in 1927. Accordingly, when our story begins in 1934, these two firms were the "traditional bankers" on the plaintiff's theory; and the relationship was definitely "satisfactory," as each of these two firms had men on the Pillsbury board of directors and the evidence otherwise indicates that they were well entrenched. Throughout the discussion which followes it is important at all times to bear in mind that the issue around which the competitive efforts of the various firms revolve, and which from time to time seemed to be taking definite form, did not materialize until 1938, when it was sold as a private placement to the Equitable Life, with Goldman Sachs and Piper Jaffray & Hopwood getting the entire agency fee.

  "Ben" Clark and John S. Pillsbury, the principal stockholder and chairman of the board of directors of Pillsbury, were close friends. How close the friendship was is indicated not only by the fact that Pillsbury wanted Clark to be trustee of a trust for his children, consulted him about schools for his boys, had his personal account, "a very valuable one," in the White Weld office, and sought advice from Clark on financial affairs "right up to the present date," but by the following incident which helped Clark, on the taking of his deposition, to fix the time when he and Pillsbury first met.

  "It is over twenty years ago. It would be more than that. I tie it in with the Sunday evenings. All six kids were about knee high, and we would all go over and mother would play the piano and we would all sing, and now they are all fathers and mothers."

  With knowledge of the prior financings by Goldman Sachs and Lane Piper & Jaffray and of the fact of the directorships, Clark, when Pillsbury asked him for advice as a banker concerning what should be done about refunding a $6,000,000 issue of 6% First Mortgage Bonds, decided to go after the managership for White Weld. The documents do not indicate when the subject was first discussed between Pillsbury and Clark; but it seems likely that Pillsbury at first brought it up as matter of personal advice. At least as early as January 8, 1935, the details were being talked of and whatever took place between Pillsbury and Clark was known to J. I Beatty, the controller of the company, as a letter from Pillsbury to Clark of that date mentions the fact that, if Clark's reply "does not arrive before my departure, it will be referred to our controller, Mr. J. I. Beatty." On the following day Clark sent Pillsbury two copies of the White Weld refunding plan, which had been revised in the light of suggestions contained in the Pillsbury letter of January 8, 1935, with the hint that one copy be left "with your man to stew over," after which the matter can be further developed "with Mr. Wattles [a White Weld employee] who will be here all the time and available."

  Subsequent memoranda show Wattles in contact with Harry H. Whiting, president of Pillsbury; and one of the significant features of the whole negotiation is that the White Weld activities were conducted under a promise of secrecy, exacted by Pillsbury from Clark. Of this there can be no doubt. The deposition testimony of Clark would indicate that Pillsbury was seeking independent help from his old friend and financial adviser.Clark testifies

  "* * * but my policy was to do everything John asked us to do with the hope we would build up a picture that John would feel so good and would show such advantages that he would say either 'Put in a bid' or 'Benny, I want you to do that business or a large proportion of it!'"

  Neither Goldman Sachs nor Piper Jaffray & Hopwood (the firm name having been changed in the interval) had any suspicion of the White Weld activities. These two firms had been active in the matter since the preceding July, most of the activity revolving about efforts by Goldman Sachs to strengthen its position with Piper Jaffray & Hopwood, who were much closer to the executives and had enjoyed a long and continuous relationship with the company. By January, 1935, Goldman Sachs and Piper Jaffray & Hopwood were tied closely together; and they gave little thought to the possibility that any other competing house could dislodge them.

  An interesting sidelight is provided by two letters from Beatty, one of January 14, 1935, to Bowers of Goldman Sachs, which tersely states that he has explained to Piper that the Goldman Sachs-Piper Jaffray & Hopwood program "does not appear to us to be favorable enough to justify the Company in undertaking to accomplish it;" and the other, of January 15, 1935, to Clark, which is cordial in tone, indicates that the White Weld plan "has been carefully studied and reviewed with a group of our executive officers," suggests a number of circumstances involving possible delay, and concludes by saying that the plan "has interested us" and that "any further ideas on this subject" will be appreciated.

  Further elaborate details were submitted by White Weld, and we find a long letter of March 29, 1935, from Whiting to Clark which, after asking Clark to "please try to fix it so that they will not be talked about," gives Clark further information, including a decision against making a private placement with several insurance companies; but which mentions incidentally that "these ideas * * * have been similarly expressed to others who have suggested plans for refinancing." Somewhere around this time, and before the next development, which upset the plans of all concerned, Clark went to Europe.

  Thus in the first stage of the Pillsbury incident White Weld, with full knowledge of the facts, and in the face of what must have seemed an almost impossible situation, had barged ahead, in complete disregard of any "practice" of "traditional banker," and was making surprising headway, all of which would have been difficult in the extreme had Goldman Sachs or Piper, Jaffray & Hopwood known what was going on.Far from seeking "clearance" from them, White Weld was doing exactly what the alleged conspiracy was supposed to be designed to prevent. No adequate explanation of this conduct of White Weld has every been proffered by government counsel.

  On April 4, 1935, in Clark's absence, Wattles "upset the applecart." Forgetful of or in ignorance of Clark's promise to Pillsbury, and thinking White Weld had the situation well in hand, Wattles went around to see Piper and told him, what was probably the fact, "that Mr. Clark had expressed to Mr. Whiting, Pres., that we wanted to ask Piper, Jaffray & Hopwood to join us in the business." Piper's reply to Wattles was non-committal; but his reaction was immediate and vigorous. A long letter to Bowers in New York is the result; and his version of the talk with Wattles differs considerably from Wattles' own memorandum on the subject. His inclination is to go around and have it out with Whiting at once, but he does not dare to act without advice from Bowers. He adds:

  "Just what will develop in the way of competition on this business I do not know but I cannot believe the business could eventuate anywhere but with us.I am however somewhat disturbed by Whiting apparently keeping the door open of his own volition with White Weld."

  Occasionally, when an investment banking firm in competition for the management of an issue finds that another firm may win out, we find a suggestion that the two work together as is sometimes done by real estate brokers with a deal in prospect. But in this situation Goldman Sachs must have thought of the lean years just behind them, and the losses connected with the Goldman Sachs Trading Corporation, and it decided to get everything for itself and Piper Jaffray & Hopwood, and to keep White Weld out of the deal at any cost, if it could.The inveterate zeal with which these two firms pursued their policy of depriving White Weld of any interest in the Pillsbury business will be developed in due course. It is another significant aspect of the Pillsbury incident, as the plaintiff's claim is that the seventeen defendant firms were acting together, in concert and conspiracy.

  Not yet aware of the mistake he had made by calling on Piper, Wattles writes to Whiting on April 5, 1935, asking for additional information "prior to setting forth an exact proposal," and this letter perhaps furnishes the key to one of the later conversations. One of the questions put up to Whiting by Wattles is:

  "(3) Whether you would wish to consider this business directly with us to a conclusion or prefer to put it on a competitive bidding basis. We, of course, feel that better results are obtained by negotiating business of this character to a conclusion with one banking house or group of houses and if a satisfactory proposal is not reached then undertaking the same proposal with another banking house. However, we are very desirous of doing this business with you and are ready to follow whatever procedure you may deem best."

  This is precisely in accord with the testimony of Clark; if the White Weld shape-up of a plan looked good enough to the company officials Clark was willing to follow any course his friend John Pillsbury might suggest; he hoped White Weld might get the business in the usual way, but he was also willing to have the matter shopped around and take the chances that the White Weld price would be the most attractive.And it is also to be inferred that Clark would not complain or "raise hell," an expression we have found in other situations, if White Weld were left out entirely. The contrast between this attitude on the part of White Weld and that of Goldman Sachs and Piper Jaffray & Hopwood is striking.

  The first salvo from the Goldman Sachs-Piper Jaffray & Hopwood batteries is fired on or just prior to April 10, 1935. "Ben" Clark is still away. Bowers has telephoned to Faris Russell of White Weld; a neat little sparring match ensued; we may suspect that Faris Russell's version, if we had it, would not quite match with that of Bowers, which is contained in his letter to Piper of April 10, 1935. Be that as it may, the gist of what Bowers had been trying to do is contained in the concluding paragraph of his letter to Piper, which reads:

  "He and Benny Clark are friends of John. I told him, of course, John would talk with him, as with everybody, but that I was absolutely confident that you and we could hold the business and all that White, Weld would do would be to bother us and make us do the business on a closer basis than was fair; that if White, Weld, who claimed to be hightoned people, felt that that was a sound and fine action to take in competing with other friendly houses, members of whom were on the Board of Pillsbury, it would be a surprise to me. I tried to put a little shame into him, and to leave him with a feeling that his conscience would have to be his guide." (Emphasis by Bowers)

  This is the old story of trying to frighten off a competitor by telling him that he has not got a chance of securing the business, and will only "muddy the water," a competitive maneuver as old as the hills. We shall see more of this when Clark returns from Europe.

  That Faris Russell was no amateur appears from a Bowers' office memorandum of April 12, 1935. He had been thinking the matter over and called Bowers back. Bearing in mind that neither Bowers nor Piper knew just what progress White Weld had made, and that this was quite apparent to Russell, we shall now see the return volley from the White Weld guns. Perhaps Bowers got some comfort from this, but it seems unlikely:

  "Faris Russell called me up this morning to say he'd like to make it clear that White, Weld & Co. were not going to be interfering with us on the Pillsbury business if the Pillsbury people finally decided that we were the bankers they wished to use; that, of course, if the Pillsbury people thought they wanted different bankers and asked White, Weld & Co. to consider financing, naturally White, Weld would be glad to do it."

  The stiletto in the remark that followed is thinly veiled.

  "He further went on to state that he had told John Pillsbury -- the whole thing with White, Weld undoubtedly arises with John -- that if he, John, was considering cutting loose from us because of, as Russell put it, unpleasantness back in '29 and '30, he was making a mistake. Russell went on to say how he had told John Pillsbury that he considered our standing and management after Catchings' elimination just as high as anybody's. Russell said that when Ben Clark came back, he and Ben would like to get together with Walter, Sidney and me and talk things over and see if the two firms perhaps couldn't do a bit more business in the future, to mutual advantage, than had been done in the past.

  "I am posting Harry Piper, and, although I think John may have had in his mind back in '30 and '31 a feeling that we were, if not down and out, considerably lowered in prestige, that has pretty well disappeared."

  The reference is undoubtedly to something connected with the ill-fated Goldman Sachs Trading Corporation.

  That Bowers was seriously disturbed is only too evident. And yet government counsel seem to regard what Russell said as some sort of a promise to hold off, which it definitely was not. This is confirmed by a letter from Clark to Whiting of May 8, 1935 expressing the continued interest of White Weld, Clark having returned from Europe, according to this letter, about April 28, 1935.

  Then followed the crucial luncheon attended by Walter Sachs, Bowers, "Ben" Clark and Russell on May 20, 1935, concerning which we have Bowers' office memorandum and the deposition testimony of Clark. After a certain amount of sparring around, concerning which Bowers does some speculating which seems to me to be of the wish-father-to-the-thought variety, the meat of Bowers' version is:

  "Ben finally remarked -- repeated this several times -- that he would not compete for the business (early in the conversation he had stated that John or Harry Whiting had written asking them to submit competing bids, which, of course, Bensaid White, Weld would absolutely decline to do -- against Piper, Jaffray & Hopwood and us, nor would he form a group to compete for the business; that, on the other hand, if a responsible official or officials of the company -- John is Chairman of the Board -- told them that the business was to be done and that the wish was White, Weld should be included, he would fight as hard as he could to be included. At the same time, he wouldn't blame us or criticize us if we endeavored to keep them out. We told him we certainly saw nothing to criticize in his attitude as finally expressed."

  Supplementing this we have the deposition testimony of "Ben" Clark:

  "Q. Just give us the substance of the conversation. A. I told Mr. Bowers, as I remember the conversation, that we would not compete -- and by 'compete' I mean only one thing; put in a competitive bid for this particular issue which was being set up -- unless we were asked to by John Pillsbury; but if we were asked to, John wanted us to, we would put in a bid for the whole thing or for any part of it and fight as hard as we could to get it.

  "Q. What do you mean by 'competitive bid'? A. I mean if John asked us to put in a bid, we would put it in and he could judge it as against any other bid.

  "Q. That is, in competition with any bid that might be put in by Goldman, Sachs & Co.? A. Any way he wanted it we would put it in."

  I believe the testimony of Clark. He alone knew what had transpired between himself and Pillsbury; he alone knew that from the first his policy had been "to do everything John asked us to do." From Clark's standpoint he could talk all he wanted to about not competing and not submitting competitive bids, provided he always mentioned the important qualificaion that he would compete, and he would even submit a competitive bid, if a responsible officer of the company, such as John Pillsbury, asked him to. It was only natural that Bowers should give the conversation an interpretation favorable to his own hopes and desires. As no writing by Pillsbury or Whiting relative to the submission of competing bids has been unearthed, I conclude that the portion of Bowers' memorandum which mentions this is the result of some misunderstanding of what Clark said.

  While government counsel insist that there was given at this luncheon meeting a definite and unqualified promise by White Weld not to compete further for the business, I find that no such assurance was given. Moreover, it seems reasonably plain that Bowers gave no such interpretation to the conversation, as Bowers' memorandum of May 20, 1935, concludes, "In the meantime, Harry and I are going to cultivate Whiting as best we can." Whatever Bowers may have thought Clark said, the net result was anxiety as to what the future course of White Weld would be.

  As late as August 2, 1935, Bowers is still worried.His memorandum of that date tells of a very friendly talk with Whiting and all the main executive officers "on all sorts of subjects, including, in a general way, the financing," but notes that John Pillsbury "had to go away to a bank meeting before we got into details on financing." The memorandum continues:

  "We discussed prices of various issues, spreads, and the entire talk was, as it were, 'in the family,' so that I really don't see how they could very well push us out of the picture if and when financing is done. They very well may, however, drive a pretty hard bargain with us."

  Concerning the interval prior to November 20, 1935, the record is silent. I infer from the correspondence between "Ben" Clark and John Pillsbury in December that, prior to this exchange of letters, to be discussed in a moment, there had been significant personal conversations between these two men. I also infer from Bowers' letter of November 20, 1935, to Whiting, that Goldman Sachs and Piper Jaffray & Hopwood had been trying desperately to get White Weld out of the picture. Taking the evidence as a whole I conclude as matter of fact that White Weld did not stop competing after the luncheon meeting of May 20, 1935. That Goldman Sachs and Piper Jaffray & Hopwood were having serious difficulties holding on to the business is evident from the tone of Bowers' letter.

  He tells Whiting, "I have thought a good deal about our talk on my last visit to Minneapolis." Plaintiff has not called Pillsbury or Whiting as witnesses, nor did it take any deposition of Bowers in the discovery proceedings. I can only infer that the conversation with Whiting had been disturbing to Bowers, as the whole tenor of the letter is a strong appeal to Whiting to continue negotiating with his firm and Piper Jaffray & Hopwood "until they [the executives of the company] are satisfied that a deal cannot be made on a proper basis." The two paragraphs principally relied on by plaintiff follow:

  "I think perhaps we differ somewhat in our approach to the problem. From the background and experience which Harry and I have had, we know that, in accordance with sound usage and custom, where men who deal in investments are close to a company through previous business done and other long association, as is the case with Harry and me and your company, the executives of a company about to do financing take same up with those occupying the position similar to Harry's and mine, and follow the matter through along that line until they are satisfied that a deal cannot be made on a proper basis, and then, and only then, go outside.

  "On the part of the bankers or dealers in securities, Harry and myself, for instance, there is, in such cases, a definite responsibility to serve the company in good times and bad, in easy situations and difficult ones. Of course, right now selling securities, particularly those of the primest quality, such as is the case in your company, is all 'beer and skittles.' I don't think, however, that in the comparatively rare and unusual cases where a company shifts about, using one banking house this time and another one another, there is, in the long run, any thing gained, and, in fact, I am convinced that there is a definite loss. As a matter of fact, most of the leading and most reputable houses look at the question in the way I have outlined it, and, where there is a connection already existing, refuse to compete. In the case of your own company, a number of heads of first-class houses have specifically stated to us that this was their position."

  What other pressures were brought to bear on the company officials by Bowers and Piper, before and after the sending of this letter, can only be surmised. These two men had been directors of the company for many years; and it was quite plain that Pillsbury could not at the time, or perhaps ever, conclude a negotiated underwritten deal with White Weld without a serious quarrel, which could do the company no good. The whole competitive pattern of Goldman Sachs and the letters of Piper Jaffray & Hopwood indicate the lengths to which they might be expected to go.

  We are not given the details of the conversations between John Pillsbury and "Ben" Clark during the ensuing fortnight, but on December 3, 1935, Clark writes to Pillsbury advising him to continue with Goldman Sachs and Piper Jaffray & Hopwood until such time as "you have found it impossible to agree with them on terms." He praises the fairmindedness of both firms, their high standing and the importance of continuity in banking relations, and concludes by stating, "I am sending copies of this letter to Harry Piper and Henry Bowers." Clark testified that he sent this letter, with copies to Piper and Bowers, to put Goldman Sachs and Piper Jaffray & Hopwood "on the spot to do a swell job for John Pillsbury." That it did put them on the spot is indicated in part by the long delay before any further developments took place, and partly by the enmity toward White Weld which we shall soon see take tangible form.

  Clark's letter to Pillsbury of December 3, 1935, opens with a reference to "the talk you and I had in connection with the financing." Clark had been "mulling" it over in his mind. Pillsbury's response of December 5, 1935 is short and significant. He wrote:

  "Your letter of the 3rd is at hand and carefully noted. Mr. Whiting has read it and we all thoroughly understand the situation and appreciate your advice."

  Clark testified that his advice was sound and that if he had it to do over again he would take the same position. Under the circumstances I believe he was right.

  That Bowers and Piper fully realized that they were "on the spot" is further indicated by a memorandum by Bowers on December 11-12, 1935. The executives now show a disposition to "negotiate with us to a definite conclusion without talking to all and sundry," as "we have all along insisted they should do," but

  "The business will have to be done closely, but, if done, it seems to me we should be able to handle it."

  The concluding portion of the memorandum, "to be held strictly confidential," is even more significant. Piper has been lenging valuable assistance in getting all the mills together to "prevent the terrible price cutting which was going on," Goldman Sachs has been helping "in getting proxies for their meeting," all of which "helps to give Harry Piper and me a better position on the bond negotiations," which are slowing up due to some trouble caused by the executives trying to handle some details with the SEC themselves instead of through Sullivan & Cromwell.

  We hear nothing more of the matter for almost two years. But, apparently, White Weld has not yet been squeezed out. A letter of June 8, 1938, from Bowers to Piper refers to further talks with John Pillsbury. "As will develop below, I gathered that he had been talking with his friend Ben Clark, and Ben probably had put a lot of ideas in his head." What these ideas were is then disclosed:

  "It seems that the Equitable holds the group insurance on the Company. Ben Clark was a friend of the President of the Equitable -- that's Parkinson. Formerly, Ben and I were both directors of the Chase with him. And Parkinson wanted to meet John. John at once said he wished to make it clear that Ben was entirely out of this, and was simply doing this friendly service at Parkinson's request.

  "John said he'd like to duck the interview with the Equitable President, but it seemed to him he couldn't do anything more than drop in to see him. He went on to imply, or, more than that, to state that he wouldn't think of doing anything more than explain to the Equitable President your position and my position on the board, the idea being that if they do anything, or could do anything with an insurance company, we should arrange it for the Company. He asked the direct question, how could it be worked out that a refunding be arranged with an insurance company or companies and you and I be taken care of."

  Private placements had been the subject of prior discussions between Clark and Pillsbury, as noted above. The general statement concerning White Weld in Part II of this opinion shows that this was an area of activity in which White Weld was something of a specialist.Clark undoubtedly thought he had handled the whole matter so adroitly, in carrying out his policy, that the very course of events would make it highly improbable that White Weld could be excluded from the business. But Bowers' letter suggests that the pressure he and Piper had exerted on John Pillsbury was so great that Pillsbury even hesitated to talk with Clark's friend Parkinson, president of the Equitable, and had "asked the direct question, how could it be worked out that a refunding be arranged with an insurance company or companies and you and I be taken care of."

  This presented no problem to Bowers and Piper. The conference with Parkinson took place, one of the White Weld men being present after arranging for the interview, and the bonds were privately placed with the Equitable. But the pressure upon John Pillsbury was such that, to the amazement and disappointment of "Ben" Clark, the agency transaction was consummated by Goldman Sachs and Piper Jaffray & Hopwood, who took the entire agency fee and White Weld got nothing for its pains.

  A faint hint as to how all this had been accomplished is to be found in another letter from Bowers to Piper, of October 31, 1939. There had been some discussions of the possibility of some changes in the Pillsbury board of directors, which might involve the elimination of Piper and perhaps Bowers also. Bowers definitely wants to stay on, even if he could not always attend meetings in Minneapolis, "not only from my own personal point of view, but from the point of view of what seems best for the interests of G. S. & Co." Bowers then expresses the hope that they can both stay on, "where we can do some more good, constructive work."

  It need cause us no surprise to find later that what had been done to White Weld in 1938 caused John Pillsbury many a twinge of conscience, nor that Bowers and Piper fully expected this. "Ben" Clark had evidently let the matter pass without a word of protest or complaint; and this must have troubled John Pillsbury all the more.

  In any event, a new Pillsbury issue was coming up in August, 1944, and on this occasion Bowers writes to Piper's partner Jaffray. At all odds White Weld must be kept out, if possible. The part of the letter of August 9, 1944, which refers to this subject, follows:

  "Incidentally, neither of us has said a word about White, Weld, and as Harry, I think, knows, Benny Clark used to be very close to John. It is possible from that that we might get almost a 'must' from John to include White, Weld in the underwriting. We have no idea of including them unless we absolutely had to."

  But on August 14, 1944, they got the "must" from John Pillsbury, who wrote asking that White Weld, as one of two people "that have done a lot of favors for me in the investment business" be given a participation. He adds:

  "You will remember that when the Equitable deal came up, Ben Clark sent one of his men with me to call on the president of the Equitable, and then later when it was explained they could not be in this picture, he certainly was pretty broad-minded, although he had every reason in the world of saying that he initiated this deal." (Emphasis that of John S. Pillsbury)

  The word "later," underlined by Pillsbury in his letter, tells the story in a word. When "Ben" Clark arranged for the conference with Parkinson, which led to the private placement with the Equitable, he naturally expected White Weld to get the business. He had never promised to defer to anyone, but had gone on competing to the end, in what he thought was the most effective way. It was only "later" that it was explained to him that White Weld "could not be in this picture."

  This was no "policing" operation by Goldman Sachs and Piper Jaffray & Hopwood. It was downright competition of the most ruthless variety. But in the 1944 issue, as a result of the insistence of John Pillsbury, and not as a "pay-off" for "deferring," White Weld received a participation of 2000 shares in a 75,000 share offering.

  8. White Weld

  The few remaining scraps received in evidence against White Weld do not merit discussion in view of what has already been written. The Pillsbury story speaks for itself. Other competitive efforts by White Weld, completely at variance with the alleged conspiratorial scheme, have already been referred to. There are many others. I find that White Weld at no time "adhered" to any "practice" of "traditional banker," nor to a "term" of any conspiracy or agreement on "successorships."

  9. Eastman Dillon

  Having in the course of two and onehalf years introduced only 13 documents against Eastman Dillon, none of which require comment, plaintiff's chief trial counsel prefaced his connecting statement against this firm with the remark

  "You see, we found at the end of the case in chief, as I suppose all prosecutors do at the end of all cases, that there is quite a variance in the quantum of evidence that has been produced against different defendants, and in the case of Eastman Dillon the evidence that we want to rely on was very largely the deposition testimony of Henry L. Bogert, and that is primarily what I would like to discuss this morning."

  During the second day of the taking of Bogert's deposition the questioning touched upon getting business away from other investment bankers, then veered away and returned again to the subject. Thus he testified that when Eastman Dillon "has a friendly and satisfactory relationship with its account" it unfortunately did not always continue to get the business; and, later, "we got all our accounts away from other people." Again, still later:

  "Q. As a matter of your experience, Mr. Bogert, does Eastman, Dillon & Co. attempt to solicit the business of an issuer which is an account of another investment banker with which it has maintained satisfactory and friendly relationship? A. We have done so."

  And he proceeds to give examples. The questioning goes off to other subjects for eight pages and then government counsel is back to the same old subject, but in a slightly different form, and he gets the answer which is supposed to prove that every defendant banking firm in the case "adheres" to the "practice" of "traditional banker."

  "Q. Isn't it a fact, Mr. Bogert, that it is customary in the investment banking business for investment bankers not to solicit the business of issuers where there is a satisfactory relationship between that issuer and a banker who had already done business for it?

  "A. Courtesy generally requires that you conduct your business in a way so as not to make enemies, and if you think that a man, a firm, a friend of yours, is engaged in doing a piece of business, it is not quite the polite thing to muscle in and upset the applecart. I think that goes for a great many other businesses as well as the investment banking industry.

  "Q. And that goes for the defendants in this case too, does it?

  * * * *

  "Q. The defendant bankers in this case? A. It goes for all of them, everybody."

  The part of Bogert's deposition which precedes this, and that which follows, indicates plainly that the witness is not attempting to describe the "practices" of the various firms, where the house which brought out the last issue is known to have "satisfactory relations" with an issuer.There is no reference whatever to the bringing out of the last issue.Nor is he expressing views similar to those of Swan, who favored continuing relationships with issuers, but stressed the futility of wasting his time and money trying to get business which was beyond his reach.

  This "burst of frankness," which is said to be so revealing, signifies no more than is said, and repeated later, that, in the opinion of the witness, when "a friend of yours is engaged in doing a piece of business," investment bankers, and those in other lines of business as well, do not generally "muscle in and upset the applecart." This gloss on human nature must be read against the background of the case as a whole, and the balance of Bogert's testimony.

  I find that Eastman Dillon at no time "adhered" to any "practice" of "traditional banker," nor to a "term" of any conspiracy or agreement on "successor ships," nor to any "code" having such or any similar provisions.

  10. Drexel

  While at no time indicating any willingness to consent to a dismissal against Drexel & Co., and save it the burden of going through a seemingly interminable trial, government counsel finally conceded that they relied on no evidence whatever against Drexel & Co. on any issue in the case, except that relating to the so-called price-fixing features of the syndicate system, which are common to the entire industry.

  With respect to Drexel, I make the same finding as that in the case of those defendant firms previously discussed in connection with the "traditional banker" and "successorships" issues.

  11. First Boston

  The history and development of First Boston as set forth in Part II of this opinion, would lead us to expect to find most of the First Boston documents in the category of "successorships," and that is where they are. The officers made some use of the Harris Forbes name, which First Boston had legally taken over, and there were the same strenuous efforts to renew old personal contacts with issuers that we have allready found in the case of Edward B. Smith & Co., only more so. The stipulated static data tell the story; there we find what each investment banking firm did with respect to every single security issue, whether or not it was part of a series brought out by the same banking firm, and we also find who the participants were, with their respective positions.

  Against this solid background of indisputable facts, and the competitive pattern of First Boston already developed in the detailed discussion of the Bethlehem Steel,1n Dominion of Canada,2g Phillips Petroleum,3b and Rochester Gas & Electric,4a situations, together ith those to come, Shell Union Oil,5a discussed under the sub-title of Dillon Read, Pacific Gas & Electric, *fn6" discussed under the sub-title of Blyth, and the Scandinavian financings, *fn7" discussed under the sub-title of Harriman Ripley, it is of little significance that, in an endeavor to reestablish a personal relationship with Columbus Railway, Light & Power Co. and get the managership of a forthcoming issue for First Boston, Addinsell should report to Macomber on September 16, 1935:

  "I also pointed out that we had adopted as a matter of policy the idea that we did not try to go after business that had banking relations even if they were inherited ones, but that, on the other hand, we were doing everything we could to retain the accounts that our antecedents had had and that we had an organization which was entirely competent to handle these matters."

  We must remember that this was little more than a year after the effective date of the Glass-Steagall Act, and the investment banking business of the "antecedents" had been of very large proportions. Naturally the primary efforts of the new First Boston organization were directed into channels where they would likely be most productive. There is no mystery whatever about the matter; nor the slightest inconsistency with Addinsell's testimony that First Boston has had an "aggressive policy with regard to continuance of business and clients that we had in the past and development of new ones."

  Province of Cordoba, Androscoggin Electric Corp., and Central Maine Power

  The other documents referred to by the government in the connecting statement on the "traditional banker" issue against First Boston are isolated and without circumstantial background. Despite the fact that one of them contains the phrase "walking on our grass" they seem to have little to do with any "traditional banker" situation, and each probably reflects competitive efforts of the sort that we have met before.

  The evidence as a whole compels a finding that First Boston never deferred to any so-called "traditional banker," made no agreement with other firms as to conspiratorial "successorships," and that it gave no adherence to any "practice" of "traditional banker" or "successorships," nor to the terms of any "code."

  12. Dillon Read

  In the case of each defendant firm the description of the history, development and general nature of the business of each, as set forth in Part II of this opinion, should be read together with what is here said about the documents, deposition testimony and static data which concerns the issues of "traditional banker" and "successorships." As against Dillon Read no deposition testimony was read, but the record sufficiently discloses that we are here dealing with an investment banking firm which holds a major position in the investment banking business.This has been true for many years; and we may expect to find those in charge of such a prominent and successful organization reluctant to chase after every will-o'-the-wisp or every piece of business that "they had the slightest chance of getting." The competitive policies of Dillon Read naturally differed markedly from those of Kidder Peabody, which started with little besides a name, and which went after practically every piece of business where they thought they might perhaps succeed in getting a managership or co-managership, to fall back if need be to a participation, large or small, or even to a selling position. Dillon Read was not particularly interested in participating in the underwritings of other firms and consequently developed no such intricate techniques as we have seen developed by other firms willing to take whatever they could get.Nor had Dillon Read felt that its particular brand of skill and ingenuity would flourish in such an atmosphere as we have found in Lehman Brothers and Goldman Sachs, which developed special service features to ferret out and even to create situations where financings could be effected, even though the management of the issuers had no financing in contemplation.

  But once having decided that a piece of business was worth their while, we shall see Karl H. Behr, James V. Forrestal, Dean Mathey, William H. Draper, Jr., and Ralph Bollard, fighting for the business to the very end, without any thought or intimation of "deferring" to any other banker "traditional" or otherwise. The notion that they might "upset the applecart," if it had occurred to these men at all, would perhaps have been an additional inducement to go ahead.Moreover, there is nothing in the evidence against Dillon Read which even suggests the existence of any "code."

  As one might expect, under these circumstances, there is no evidence against Dillon Read on "successorship," except documents of such trifling significance as to be de minimis.

  On the subject of "traditional banker" we have a series of disconnected scraps, in addition to the Outlet Co.,1o Beneficial Industrial Loan,2h and Union Oil3c situations, which have already been commented on under "directorships." Others not referred to in the final briefs or in the connecting statement against Dillon Read, have also been discussed, including Amerada Petroleum,4b National Cash Register,5b and Rheem.6a Each and every one of these other miscellaneous documents reflects no more than the consideration of purely business factors which the Dillon Read executives mulled over before they decided that they did not wish to compete. Again and again we meet M. L. Freeman, the intermediary or finder. Pacific Gas & Electric will be treated later.7a

  Scovill Manufacturing Co., Scripps, Porto Rican American Tobacco Co., Argentine Government, American Radiator and Grand Trunk Western

  In three of these situations, Scovill and Scripps, brought in by Freeman, and Porto Rican American Tobacco Co., about which we know nothing but the fact that it never brought out any financing, so far as disclosed by the static data, the matters were discussed in the Dillon Read office and rejected, either without any statement of reasons or as "unwise" or "we would not be interested in this business." Had the conspiracy been in operation and had there been any "traditional banker," there would have been no occasion for discussion, the business would have been refused out of hand, even assuming there was any reasonable chance of getting it, and further assuming that Dillon Read considered it desirable business, neither of which appear.With respect to the Argentine Government and American Radiator there was little to suggest that the business could be got away from Morgan Stanley and much to indicate that it could not. Dillon Read showed interest in the Grand Trunk Western Railroad (of Canada) financing in February, 1930, and Waddell recommended to Forrestal, Bollard and Riter that a letter be written to Sir Henry Thornton, suggesting that the matter be discussed with him as soon as convenient; but we know nothing further.

  United Drug

  A variety of miscellaneous documents introduced against Dillon Read and Kidder Peabody and some deposition testimony by Gordon, Forgan and Ripley, supplemented by documents introduced by Glore Forgan and Smith Barney, enable me to piece this situation together.

  "Old" Kidder Peabody, together with Chase Securities, Bankers Trust, Shawmut and F. S. Moseley had offered the last pre-Securities Act issue in April, 1928. The next issue, which the various documents above referred to concern, was a simultaneous issue on August 5, 1943, of $20,000,000 Sinking Fund Debentures and $10,000,000 of Cumulative Preferred Stock, both managed by Smith Barney alone. According to the testimony of Gordon, Forgan and Ripley, each of the three firms, Kidder Peabody, Glore Forgan and Harriman Ripley, competed actively for the business but lost out to Smith Barney.

  Freeman, who had some contact with Liggett, came to Dillon Read on December 9, 1936, but Behr told him "we might not want to be put in a position of negotiating with a client of Kidder Peabody." Freeman explained that Liggett had told him the United Drug had dealt through Windsor who had died and that United Drug "felt no obligation whatsoever to the new firm of Kidder Peabody." The upshot was that the Dillon Read people conferred together and decided to talk, not to Kidder Peabody, but to United Drug. The next memorandum of Behr is dated December 8, 1936, and indicates that Behr had discussed details of the proposed financing with Lewis J. Hunter, a director of United Drug who was handling its financial matters, but Behr came "to the conclusion that at the present time we could not work out a refunding of this issue to show any real savings to the United Drug." Hunter hoped Behr would call again when next in Boston, and promised to see Behr "and just chat about the matter" when Hunter came to New York. A further memorandum of December 29, 1936, tells us that Behr had told Hunter over the phone that he did not wish to go further if the company had notified Kidder Peabody that they would not discuss the matter elsewhere, but Hunter said that he no longer considered Kidder Peabody (the new firm) their bankers "although they would be very happy to do business with them or any other first class banking house."

  Prior to all this, Hovey of Kidder Peabody had formed a nucleus group with First Boston to go after this same business, according to a letter from Hovey to Webster of Stone & Webster and Blodget, Inc., under date of September 9, 1936, and there was discussion with Hunter on September 12, 1936, relative to taking Field Glore into this group, which Hunter approved. The matter was further discussed between the Kidder Peabody partners at a luncheon meeting on November 24, 1936.

  What all this adds up to is merely that Dillon Read, Kidder Peabody, First Boston and Field Glore were going after the business, despite the fact that on plaintiff's theory only Kidder Peabody, as "successor" to the "old" firm was the "traditional banker" by "inheritance," and they all lost out to Smith Barney who, as above stated, brought out the next two simultaneous issues of United Drug on August 5, 1943. It is interesting to note, however, that Dillon Read succeeded Smith Barney and was manager of the next issue in 1946.

  Shell Union Oil

  The documents relating to Shell Union are numerous; pieced together they give a fairly complete picture of a series of negotiations relative to a number of Shell Union financings; and they affect Lehman Brothers, First Boston and Dillon Read.

  Following their usual procedure, counsel for the government stressed, in their connecting statement against Dillon Read, a single document, which was an Addinsell memorandum of March 10, 1937, giving the substance of a luncheon conference with Mathey of Dillon Read. The part emphasized by counsel for the government reads:

  "Having in mind the tremendous trading proclivities of the management and the experience with the debenture issue, Mr. Mathey is determined to avoid being crowded up by the company with regard to the terms of the setup and the price. He feels, especially in view of the fact that the Shell is not as favorably regarded as some of the other oil companies in spite of what he says is its better statistical position as compared, for example, with Texas and Tide Water, and in view of his experience with the note issue, that it is absolutely essential to a successful offering that it be put out on an obviously attractive basis.

  "He is sure that the company will be shocked at the proposal he has in mind making, and that their first impulse will be to try to go somewhere else. You will recall that the syndicate in the last issue was a pretty comprehensive one and he thinks that the only possible place they might go to is Kuhn Loeb, and there are probably reasons why they would not go even to them. He is anxious, however, to have his group present a selid front to the company and in effect, to agree that if the Shell Union does not trade with the Dillon Read-Hayden Stone-Lee Higginson group, the members of this group will not join any other bankers who may attempt to form a group to figure on the business. In view of the well-known trading proclivities of the Shell people, I have agreed in principle to Mr. Mathey's suggestion on the theory that if our large and strong group cannot get the business on terms that we feel attractive we will be better off to be out of the business."

  As disclosed by other documents, the conversation was proper in every way, as First Boston was a member of a Dillon Read-Hayden Stone Group, which had been formed at the suggestion of Shell Union, and which was competing for a preferred stock refunding financing which was later abandoned. Mathey was speaking as the spokesman or negotiator for Dillon Read, the group leader, as he testified before the TNEC; and Addinsell could have dropped out had he thought Mathey's suggestion not in the best interests of First Boston.The last previous issue was one of $60,000,000 Debentures offered by Dillon Read and Hayden Stone on March 10, 1936. This issue had not been success ful.

  The history of the competition for the various earlier issues, which forms the background to the Addinsell memorandum is revealing and significant, when the documents are considered in chronological sequence.

  In the pre-Securities Act period Hayden Stone had offered a common stock issue as an underwritten offering to shareholders in 1922; but in most of the issues, including the last one of $50,000,000 Debentures in 1929, Lee Higginson was alone in privity with the issuer. The first post-Securities Act issue was a private placement of $9,000,000 of Serial Notes, with Hayden Stone, Kuhn Loeb, Lee Higginson and Edward B. Smith & Co. acting together as agents for the seller.

  Lehman Brothers started competing for Shell Union business prior to June, 1935, when we find Lehman Brothers heading a group including Speyer and Salomon Bros. & Hutzler.On that date Lehman Brothers proposed to make an offer "which of course should be confidential and not to be disclosed to any competitive bankers" at a fixed price, and with a forfeiture of $100,000, if later not prepared to go ahead with the deal.We have already observed that market changes during any lag in time, between the naming of a price and the preparation of the details, make it impractical for a banker to make a firm proposal applicable to some uncertain future date. This forfeiture proposition of Lehman Brothers was not satisfactory to Shell Union, but the company expressed its willingness to receive a bid.

  In July, 1935, Lehman Brothers said it would submit a bid, "providing we had your assurance that if our bid were more favorable to the company than that of any other bankers, the business would be given to us, and provided our bid were not used for the purpose of renegotiating with others." But this proposal was not acceptable.

  There were then two other groups competing for the business, Dillon Read heading one group, and Hayden Stone-Lee Higginson the other. As early as December 11, 1935, First Boston was a member of the Hayden Stone-Lee Higginson group. Various documents show Dillon Read in active competition at an early date.

  Accordingly, the next proposition of Lehman Brothers was that the three groups submit bids, with the understanding that the leadership of the business was to go to the submitter of the best bid, the other two bidders each to be offered one-third participation in the business on equal terms. After some deliberating Shell Union finally, and on January 22, 1936, rejected the simultaneous bid suggestion and undertook discussions which resulted in an agreement that Dillon Read and Hayden Stone would proceed jointly. A confidential message from the Shell Union New York office to van Eck of Shell Union in London, on January 22, 1936, states almost in so many words that the two groups were brought together at the request of Shell Union.

  The immediate result of the combination of the two groups was that on January 31, 1936, Egly of Dillon Read called Ford of First Boston, told him the groups had joined and asked him if First Boston would go along. Ford checked with Gernon of Hayden Stone, his previous team leader, verified the fact that the groups had joined, and then called Forrestal of Dillon Read and told him that First Boston would accept the proposal that it become a member of the newly formed group.Accordingly, when the $60,000,000 issue of Debentures was brought out by Dillon Read and Hayden Stone as co-managers on March 10, 1936, First Boston was a participant, in the amount of $3,600,000.

  Two months later, Lehman Brothers, despite the fact that Dillon Read was the "traditional banker," on plaintiff's theory was still competing for the management of whatever new issues Shell Union might bring out. There was some Batavian Petroleum refunding to be done. The Shell Union setup was: Royal Dutch owned 60% of Batavian Petroleum, the other 40% was owned by Shell Transport and Trading; and Batavian Petroleum owned 64% of Shell Union. The competition by Lehman Brothers was vigorous but unavailing.

  Then there came up the possible refinancing of Shell Union's outstanding 5 1/2% preferred stock, which brings us almost back to Addinsell's memorandum of March 10, 1937, which is where we started.

  A cable of March 2, 1937, from Shell Union's London office to van der Woude in New York states:

  "Our opinion is it would be a mistake to start bargaining with bankers and as in case of recent bond issue best course would be decide what are fair terms and then wait until bankers can meet them (fullstop) Feel that Dillon Read Lehman Bros. certainly are entitled to participate even if you do not feel either should sponsor issue but we shall wait for your proposals"

  There are other documents of March 5, 1937, and March 8, 1937, indicating further competitive maneuvers by Shell Union and LEhman Brothers.

  Hence, when Matthey told Addinsell at their luncheon meeting on March 10, 1937, that he was anxious "to have his group present a solid front to the company," it was one "partner" talking to another, and what he proposed was no more than reasonable, as "the wellknown trading proclivities of the Shell people" are clearly reflected in the documents in evidence in this case. Addinsell thought that First Boston would be better off out of the Shell Union business if not done on terms he believed attractive, and, in view of the unprofitable experience had with the last issue, I believe he was right. And so he agreed to go alone with Mathey's suggestion.

  In the meantime, according to a Lehman Brothers memorandum by Walter A. Weiss, an employee, the New Business Department had discussed the Shell Union financing, and Robert Lehman "thought we should call Forrestal at Dillon Read and tell him that we are going to try and get this business if we can, since he paid us this same courtesy in the past." Probably the fact that LEhman Brothers was after the business and had been after it for some time, was no news to Forrestal. In any event, Lehman Brothers tried to get van der Woude to designate Lehman Brothers as co-manager; when this did not work, they got after Boyle in the London office; finally van der Woude confirmed the fact that he had been instructed to request Dillon Read to include Lehman Brothers as co-manager. This led to further suggestions back and forth. Dillon Read seemed to be on the way out; and, surprisingly enough, van der Woude cabled the London office on March 17, 1937, to the effect that, provided it is made clear that negotiations with Dillon Read have come to an end, "suggest we consider Kuhn Loeb/Lehman combination or Morgan Stanley as leaders." Whatever might become of Dillon Read, Lehman Brothers was still in. Even as van der Woude wrote van Eck on June 17, 1937, that economic conditions were such that it was inadvisable to offer Shell Union securities at that time, an optimistic memorandum by Weiss of Lehman Brothers, about a month later, expresses the opinion "that this deal is getting very close to being doable."

  But the preferred stock financing never was done; the next financing was a private placement of $25,000,000 Serial Notes without the services of any investment banker; and Morgan Stanley managed the next three issues in 1939, 1941 and 1946.

  The part played by Dillon Read in the Scandinavian financings will be discussed later,1p but it will do no harm to mention here that Forrestal went after this business as hard as he could, and refused to be frightened off by the competitive maneuvers of other defendant firms. He gave in only when he was beaten and some of the others got the business.

  The evidence as a whole compels a finding that Dillon Read never deferred to any so-called "traditional banker," made no agreement with other firms as to conspiratorial "successorships," and that it gave no adherence to any "practice" of "traditional banker" or "successorship," nor to the terms of any "code."


  The competitive pattern of Blyth has been gradually shaping up.It is partly disclosed in the discussion of Butler Brothers,2i Pan American Airways,3d and Anaconda.4c But the chief reliance of government counsel is placed upon a long series of documents having to do with various financings of Pacific Gas & Electric, and a secondary relative to 700,000 shares of Pacific Gas & Electric common stock held by North American Company, all of which will now be closely examined. Plaintiff's claim is that the inferences to be drawn from the very numerous transactions reflected in these documents go far to establish government claims on the issues of "traditional banker," "successorships" and the "devices adopted by defendants to circumvent" regulations of the SEC relative to competitive bidding, against Blyth, Dillon Read, First Boston and Lehman Brothers, but especially against Blyth.It will soon appear, however, as it has already appeared upon a close scrutiny of so many other issuer situations, that, despite a few quotations of scraps taken from the documents here and there, the Pacific Gas & Electric negotiations show a healthy state of vigorous competition, quite at variance with any "practice" of "traditional banker" or conspiratorial "inheritance." As the Pacific Gas & Electric story cuts through the very center of the case, it will also serve as an introduction to Part VI of this opinion, which will presently bring us within sight of the end, under the title, "Alleged Conspiratorial Opposition of the Seventeen Defendant Banking Firms to 'Shopping Around,' and to the Campaign for Compulsory Public Sealed Bidding; and the Alleged Adoption of Devices to Sabotage SEC Rule U-50 and Compulsory Public Sealed Bidding in General."

  Pacific Gas & Electric

  Pacific Gas & Electric, the largest public utility on the West Coast, has since 1905 been a lighting and gas operating company in Northern and Central California, with its main offices in San Francisco.Over the years it acquired the plants of, or gained control of, several local light and gas utilities, but remained primarily an operating company in function and structure, with local interests and a preference for Californians on its board of directors.

  In June, 1930, Pacific Gas & Electric made an arrangement with North American Company whereby Pacific Gas & Electric Stock was traded to North American in exchange for the control of three local operating companies, including Great Western Power Company. From this latter concern came James Black, a vice-president of North American and a director of Pacific Gas & Electric, whose president was the redoubtable A. E. Hockenbeamer, described in many of the documents as "Hock." Shortly after Hockenbeamer died on November 11, 1935, Blac became president of Pacific Gas & Electric. Harrison Williams was a dominant figure in North American.

  During the pre-Securities Act period Blyth Witter, and later Blyth, was forging ahead as an investment banking firm especially interested in public utilities, and gradually developing an efficient sales and distributing organization in the California area. One of the prize plums was the financing of Pacific Gas & Electric.Hockenbeamer, at least later on, and probably at all times, was a believer in continuing relations between his company and the firm selected to manage its numerous financings, which necessarily had to fit into the elaborate and complex plans of the company for expansion. And so it was quite a feather in the cap of Blyth Witter when, in July 1919, it became the sole offeror of a $5,000,000 underwritten offering of Pacific Gas & Electric preferred stock. On a bidding basis Blyth Witter also won out against NAtional City Company on the next issue, which was brought out as an underwritten public offering in May, 1920. To assist the firm in underwriting and distributing the issue, which Blyth Witter had already been selected to head, Blyth Witter teamed up with Continental & Commercial Trust & Savings Bank, and Halsey Stuart. Harold L. Stuart testified that the proposal was that if his firm joined, "the three of us would become the future bankers for Pacific Gas & Electric."

  But the Fates ruled otherwise. Stanley Russell, a vice-president in the buying department of National City, got ahead of the rest, and in the balance of the pre-Securities Act period NAtional City served Hockenbeamer to his satisfaction, and brought out all the remaining security issues of Pacific Gas & Electric, which were numerous.

  Competition for Leadership 1934-1936

  After the effective date of the Glass-Steagall Act, there was a mightly struggle for the Pacific Gas & Electric business, and the principal contestants were precisely those one would expect to find in the arena, wholly apart from the existence of any conspiracy, and they acted in a manner not at all consistent with the conspiracy as charged. Naturally, the men who had been with the National City were on the job; Stanley Russell, with his long established personal relationship with Hockenbeamer, had gone to Lazard Freres and he seemed to have the best chance; but the greater part of the National City employees, including no doubt many who had worked on Pacific Gas & Electric business, had gone with Brown Harriman, and so we find Ripley after the business. Mitchell did not join Blyth until June 17, 1935, and it is clear that Blyth's efforts, which began some little time before February, 1935, were in no way based upon or connected with any claim by Blyth that it had "inherited" this business from National City. As a matter of fact, Blyth at no time, before or after Mitchell joined the firm, claimed that they had "inherited" the Pacific Gas & Electric business. Despite the presence of Lazard and Brown Harriman, Blyth is in the melee fighting manfully; some of Blyth's arguments have great weight, others seem less cogent, but there is no doubt Blyth realized the man to beat was Russell.

  A letter from Leib to Black on February 21, 1935, is relied on by government counsel simply because it contains the words "heirs," "historic" and "legacy," the use of which is supposed to indicate adherence to the conspiratorial scheme. But the letter as a whole will bear no such interpretation. Leib is not claiming that Blyth has inherited any "traditional banker" rights. How could he, as the "traditional banker" on plaintiff's theory must be Brown Harriman. Lazard Freres could have no conspiratorial rights, as that firm is described throughout as not a member of the combination. Leib is trying to refute the argument that he knows will be made by both Lazard and Brown Harriman that each ought to get the business because of the former association of their personnel with the Pacific Gas & Electric business, and the letter is replete with insinuations that there is no "heir."

  In the very first paragraph Leib uses the word "heirs," with an entirely different meaning, not in the slightest helpful to plaintiff:

  "As you know, Elsey and the American Trust would like to have us heirs to their sixteen percent interest in the Pacific Gas business. This, coupled with our historic connection with the business, would appear to entitle us to head this account * * *."

  The American Trust had never brought out any Pacific Gas & Electric business; it could not be "traditional banker." The reference is to an underwriting participation had by American Trust in prior issues, and this also is the significance of the reference to Blyth's "historic" connection, as Blyth or Blyth Witter had been a participant also.What this all adds up to is serious and effective competitive effort having nothing to do with any "traditional banker," nor to any "claim" by Blyth to "successorship" nor any "recognition" by Blyth of "successorship" in or by any other firm. Knowing that Elsey and Black were directors of Pacific Gas & Electric, Blyth had sought Elsey's assistance in the Blyth struggle for the managership. In prevailing upon the American Trust through Elsey, its president, to say it would like Blyth to be "heirs" to its sixteen percent participation, Blyth was merely using another argument to get the managership. As matters turned out later on, it is clear that obtaining the assistance of Black and Elsey was a master stroke; and the expression of confidence by American Trust, and Blyth's own historical position in the business, were indications that Blyth understood the background and had the necessary sales force and connections to do a good job of distribution.

  Indeed, there is no need for speculation on the subject, as the letter to Black on its face goes directly to the merits:

  "I believe that we represent the best balanced outfit in the syndicate.We have our own wire and private telephones to Boston -- Philadelphia -- Cleveland -- Chicago -- San Francisco -- Los Angeles -- Portland -- Seattle. We use these wires and telephones exclusively. No one else is on them.

  "We have nineteen offices, and we have one hundred and twenty-five salesmen.

  "We have a large dealer following as we trade daily with most of the important dealers throughout the country.

  "Our historic connection with Pacific Gas & Electric Company dates back many years, and we have not changed our identity throughout the past few years.

  "I believe that Blyth & Co., Inc. should head this syndicate.We appear to be the logical selection from every standpoint."

  Leib also sketches out two alternate plans, the first along the line of "giving no consideration to Hock's personal feelings for Stanley Russell," and the second based upon the "practicabilities" of the situation. Needless to say, in each plan Blyth is in first position as sole manager.

  The Blyth competition made such progress that hockenbeamer suggested the possibility of Lazard and Blyth handling the issue together as co-managers, according to a telegram from Leib to Charles R. Blyth on February 21, 1935; and at one time Blyth thought Russell had accepted this proposal. But it turned out that he had not, and, after a short period of uncertainty, Blyth was reluctantly forced to admit defeat. First Boston had been after the business too. Indeed, Addinsell had written directly to Hockenbeamer on the subject as early as August 3, 1934. And it is interesting to note in an inter-office communication by Woods, dated February 25, 1935, that First Boston knew before Blyth did that Lazard had won out.

  Accordingly, Blyth lost the first engagement in the post-Securities Act period; and Lazard as sole manager broughtout out the $45,000,000 issue of First and Refunding Mortgage Bonds of Pacific Gas & Electric on March 28, 1935.

  It is not ecessary to follow so closely the competition for the next succeeding issue, $30,000,000 of additional First and Refunding Mortgage Bonds, which came out on June i6, 1935, under the co-managership of Blyth and Lazard. By this time Brown Harriman had been eliminated as a competitive factor, and First Boston had never been any better off than any one of the host of other investment banking houses going after this business. Thus Blyth by sheer tenacity and the use of arguments based on its increasingly important position as a Californian underwriter and distributor of securities, had strictly on the merits won the second engagement; and had won it while Hockbeamer was still alive and Mitchell not yet functioning.It will be recally that he joined Blyth on June 17, 1935, and there is nothing in the record even to suggest that he had anything to do with the $30,000,000 issue just referred to. And the status quo was maintained throughout the year 1935, as a $20,000,000 issue of additional First and Refunding Mortgage Bonds was brought out by Blyth and Lazard as co-managers on September 25, 1935.

  In the next few months, Hockenbeamer having died on November 11, 1935, to be succeeded by Black as president, Blyth's efforts were at last rewarded and Lazard was eliminated as a co-manager. On March 24, 1936, Blyth as sole manager brought out a $90,000,000 issue. This was partly due to some good work by Mitchell who sought aid from Harrison Williams, who "certainly hd no leaning for Lazard."

  The documents here furnish government counsel with a few more quotations, but they are as chaff in the wind when compared with the continuous and uninterrupted competitive efforts by Blyth in derogation of the terms of the alleged conspiracy. Charles R. Blyth writes Mitchell, "We might well break into some of Dillon's preserves there, in a way they couldn't criticise too severely." Mitchell writes Blyth that Williams had told him "that he is no more tied to Dillon Read & Co. for his financing than he is tied to us." When they are about to oust Lazard from its co-managership, Leib is worried lest they be criticised for "partner knifing" and "boring from within against a partner" and writes further "we are walking on dangerous grounds, and that much thought should be given to each step we take." But Mitchell testified on deposition, "It never bothered me for one minute." And he was right.Had Lazard and Blyth been operating together from the first on joint account, as might appear to be the fact to others in the investment banking industry, who did not know the facts, criticism might well have been forthcoming and on such a state of facts it might perhaps have been justified. But Mitchell knew that the firms had been competing against one another for the management from the time of the elimination of National City by the operation of the Glass-Steagall Act, and that the co-managerships in connection with the last two issues gave rise to no fiduciary duties whatever. He knew these facts were easily demonstrable.It is just another instance of the personal reactions of different individuals to the same state of facts. Blyth was not "walking on dangerous grounds," even though Leib might have thought so; nor was there any sound basis for a "terrific yell" by Lazard and the making of a claim of "partner knifing."

  It is a tedious but necessary task thus to review the contents of this prodigious record; but in no other way can light and air be permitted to enter and dispel the impression which might otherwise be created by the accumulation of such disconnected phrases as those just set forth. The very accumulation of them might well lead to the suspicion that where there is smoke there must be fire. Such a suspicion can be laid at rest only by a careful and persistent study, in the case of each document, of the context in its entirety, and the attendant circumstances whenever they are revealed in deposition testimony or in other documents in evidence. Thus, and thus only, can the true "mosaic" be put together.

  In view of the fact that Pacific Gas & Electric had embarked upon a vast and continued program of expansion, requiring a long series of interrelated security issues, the suggestion that Blyth succeeded in maintaining its position as "the banker" for Pacific Gas & Electric for many years, due to the operation of the alleged conspiracy, is without evidence to support it. Blyth's position on the Pacific Coast and its fine record of performance seem to afford a much more natural and reasonable explanation; and the same is true with respect to the use of the same group of underwriters in one issue after another. Blyth was thoroughly familiar with the capital structure of Pacific Gas & Electric, had a splendid distribution record, worked well with the management in the shaping up of the various security issues, and had a complete understanding of its long range plans for future financings.

  The Alleged Overly-Large Syndicate Formed By Blyth in Connection with the $80,000,000 Lssue of March 27, 1945

  We now enter a phase of the long-drawn-out campaign of Halsey Stuart and others for compulsory public sealed bidding. In substance it will appear in the end that an underwriting group was formed by Blyth with the intention of offering a negotiated underwritten issue, with the cooperation and approval of Black, but the decision of the Supreme Court sustaining the ruling of the SEC that Pacific Gas & Electric was a subsidiary of North American, and hence subject to the provisions of the Public Utility Holding Company Act of 1935 and Rule U-50,1q together with a ruling of the California Railroad Commission on the same day, March 12, 1945, that the issue should be sold at public sealed bidding, forced the abandonment of the plan of the management to offer an underwritten negotiated issue. When the bids were opened it was found that Blyth won, and the only other bidder, Halsey Stuart lost.

  Plaintiff's claim with reference to alleged overly-large syndicates is succinctly stated in its Trial Brief on the Facts as follows:

  "One of the devices used by defendant bankers to defeat the spirit, if not the letter, of statutes requiring compulsory competitive bidding in the merchandising of securities is the creation of syndicates which are larger in size and in underwriting strength than necessary to handle the particular issue involved. Such overly-large syndicates usually include not only a larger number of participants than necessary, but also a number of underwriters who, standing alone, are strong enough to handle the leadership of a syndicate. The net result of the formation of such an overly-large syndicate is that with most of the large and capable houses included in the syndicate there is little or no possibility of anyone else forming a syndicate from the remaining available under writing strength to compete with the overly-large syndicate. Hence, the issuer is confronted with a single bid, that bid coming from the overly-large syndicate. In such a situation there is obviously no real competition and the mere observance of the forms of competitive bidding is camouflage and does not change the substantive non-competitive character of the transaction."

  There are two items of background. One is a letter sent by Blyth on May 11, 1942, to 87 investment banking firms.We shall return to this later; it seems to have no connection with the $80,000,000 issue now under discussion.The other such item is the offer by Blyth on October 24, 1944, of a $115,000,000 negotiated underwritten issue, as part of the Pacific Gas & Electric refunding program. It is conceded by government counsel that this large issue "was not financed through a syndicate that was 'overly-large,'" despite the fact that there were 167 underwriters. It has significance only by way of comparison with the later $80,000,000 issue and because of certain telegrams by Eaton, making extravagant charges of monopoly and conspiracy in connection with this particular issue, which government counsel do not appear to support. Otis & Co. was not one of the participating underwriters.

  On November 18, 1944, Blyth informed Halsey Stuart that it was forming an underwriting group and invited tht firm to join. Stuart's response was that he was going to ask permission to have the issue put up for bidding.Again and again Stuart approached Black on the subject, but Black refused to change his decision that the issue come out as a negotiated underwritten piece of financing. Stuart then sought the assistance of Leslie Fournier, assistant to the Chairman of the SEC, got his bidding group together and appealed to the California Railroad Commission. Black was adamant, saying that he thought highly of Blyth and had always received the price he wanted from Blyth and did not desire that the issue be sold at public sealed bidding.

  But the course of events favored Stuart, as above stated. Blyth then informed the members of its group that there would have to be a change over to public sealed bidding, and that any who wished to do so might drop out. Some of them did. The bids were then presented and Halsey Stuart lost.There is no basis here for a finding tht Blyth had an overly-large syndicate, despite the fact that Stuart testified that his account was "weak." The Blyth syndicate was formed with the usual consideration for elements of underwriting and distributing strength relevant to a negotiated transaction, and no one could have foreseen what the Supreme Court or the California Railroad Commission would decide nor when a decision might be handed down by the Supreme Court. The very circumstance that the group was formed to offer a negotiated transaction, which might well have eventuated, goes far to dispel any notion that an overly-large number of underwriters were assembled for the purpose of sabotaging public sealed bidding.

  That Blyth was using every legitimate and proper means to stay with Pacific Gas & Electric business provides no basis for criticism; nor is it to be wondered at that almost all of the underwriters remained in the Blyth syndicate, as Blyth's familiarity with Pacific Gas & Electric financings and plans for the future as well as its intimate knowledge of the problems of distribution, would make it seem probably that Blyth would be in a better position to make the best and safest bid.

  While Morgan Stanley had informed Mitchell on November 25, 1944, that it was not likely Morgan Stanley would go along if a court decision required public sealed bidding, the fact is that they did join the Blyth account.

  Accordingly, I find that what was done by Blyth and those who joined its group as participating underwriters had no relation to any over-all, integrated combination and conspiracy, and that there was no effort or design to form an overly-large account. This conclusion is also supported by the testimony of Harold L. Stuart that there is no objective test known to him by which a judge or anyone else can tell whether or not an account is overly-large. The factors are too subjective and nebulous. We shall return again later to this testimony by Stuart.

  The Sale in 1945 of 700,000 Shares of Common Stock of Pacific Gas & Electric Held by North American

  The substance of plaintiff's charge here is that Blyth, Dillon Read and Lehman Brothers combined and conspired together with the intent and purpose of assisting Blyth to form a public sealed bidding account of such formidable proportions as to make the submission of a competing bid impractical, thus furthering the plans of Blyth to consolidate its position as alleged "traditional banker" and with the further intent and purpose of circumventing the operation of Rule U-50, all within the framework of the alleged integrated over-all conspiracy of the 17 defendant firms. While admitting that the ruling is not binding on this court, consel for the government repeatedly stress the finding of the SEC, in a proceeding to obtain approval of the acceptance of the Blyth bid, which was the only one submitted, to the effect that "we are satisfied that competitive conditions were not maintained; on the contrary, effective competition was stifled or precluded."1r

  The various features of this alleged Blyth-Dillon Read-Lehman Brothers scheme are complicated and cover a period of several years; the "opinion and findings" of the SEC contin a number of demonstrable factual errors; the evidence before the SEC and the proofs before me are far from similar; and the whole incident is of no more than peripheral consequence, in view of the state of the evidence taken as a whole. While the actual decision of the SEC that "competitive conditions were not maintained" seems supported by substantial evidence, there is grave doubt that the dictum and supporting findings were warranted. For reasons which will presently appear, upon a review of the evidence before me on this issue, I disagree with the supplemental and unnecessary conclusions thus arrived at by the SEC, but merely find that the evidence in this record is insufficient to warrant findings similar to those made by the SEC.

  Rule U-50 took effect May 7, 1941. For some time thereafter no one knew whether Pacific Gas & Glectric would be held to be a subsidiary of North American under Section 11 of the Public Utility Holding Company Act of 1935; the SEC Trial Examiner had found in favor of Pacific Gas & Electric; the SEC ruled otherwise; the Ninth Circuit Court of Appeals sat en banc and affirmed, with two judges dissenting; and, finally, as we have already noticed, the Supreme Court affirmed on March 12, 1945, but by an equally divided court, Mr. Justice Douglas not viting.1s

  Curiously enough, government counsel made no attempt to establish its charges against Blyth, Dillon Read and Lehman Brothers by calling any witnesses or by producing the full documentary record; they did not even offer evidence of the number of underwriters in the Blyth bidding account nor of their identity or underwriting strength. It was thought sufficient to rely upon a few documents and some deposition testimony of Mitchell, but I was asked again and again to read and carefully to study the SEC "opinion and findings"; and I did so.

  The net result, without making a long story of it, may be summarized. The Blyth letter of May 11, 1942, to 87 investment banking firms, including those with underwriting positions in a $110,000,000 issue in March, 1941, "which failed to eventuate," merely informed those to whom the letter was sent that if "sizeable business" came along, "we would expect to form an account under our management and to invite you to participate." No commitment was requested, only an expression relative to commitments which might interfere. There is the usual reliance by government counsel on statements erroneously made. Mitchell later referred to this as a "standby account"; but it was not. That any plan to organize an overly-large syndicate to be made up years later was in the minds of the Blyth people when this letter went out seems most improbable. That Mitchell had been requested by Dillon Read in early May, 1942, to join a Dillon Read account for the possible sale of securities in the North American treasury, and tht Mitchell had said Blyth would go along, except that it expected to form its own account on Pacific Gas & Electric, proves no agreement with Dillon Read to parcel out the securities of the "subsidiaries," even if a similar conversation was had between Dillon Read and First Boston relative to Detroit Edison, and despite the fact that on May 9, 1942, Dillon Read started forming an account, which made no reference to securities of Pacific Gas & Electric and Detroit Edison. There is no evidence whatever of any conversations between Blyth and First Boston. Moreover, each firm was proceeding in a way which seems normal and proper; and the subsequent acts of Dillon Read belie the making of any deal or promise that it would not compete for Pacific Gas & Electric or Detroit Edison business. That Blyth, with its rich background of knowledge and experience, both with respect to the complicated financial structure and the difficult problem of distribution of Pacific Gas & Electric securities, should do everything possible to retain the position it had fought so hard to attain, is merely further evidence of healthy competition, and helps not one iota to sustain any part of the "triple concept."

  True it is that an undated "compilation" from the files of Blyth describes Dillon Read and First Boston as having "accepted." But the letters from both firms, which are in evidence and before me merely answered the question contained in the Blyth letter of May 11, 1942, and stated that they had "no commitments," and would be glad to hear further from Blyth in due course.

  This step one is important. Statements in documents from the files of alleged co-conspirators are generally significant, when the staements are made contemporaneously with the events they describe; but they lose significance when other contemporary documents demonstrate their falsity or when they are merely misdescriptions of writings which read the same today as when they were composed. There is no proof here that Blyth, Dillon Read and First Boston made any agreement whatever; Blyth formed no standby account in May, 1942; and Lehman Brothers wrote a declination, indicating its intention to form a competing account, which it later did.

  Almost three years elapse before we come to step two. The $115,000,000 negotiated underwritten issue, and the $80,000,000 issue which was offered at public sealed bidding, both of which have already been discussed, came out under Blyth management, on October 24, 1944 and March 27, 1945, respectively.

  In the meantime, without taking the trouble to set forth the details, Blyth's public sealed bidding record was such as to make any charge that Blyth was attempting to sabotage public sealed bidding under Rule U-50, mere empty words, completely at variance with the indisputable facts.

  In March, 1945, Fogarty, president of North American, knew that his Company's holdings of Pacific Gas & Electric common stock must be sold. No previous block of common stock of comparable size and dollar value had been disposed of pursuant to the mandate of the Public Utility Holding Company Act of 1935; and it is not strange that Fogarty preferred a negotiated underwritten transaction, and made application to the SEC for an exemption, which was denied. The events of March and April, 1945, developed quickly and followed one another in rapid succession.The first two public sealed bidding accounts to be formed were by Dillon Read and by a Lehman Brothers-Merrill Lynch Pierce Fenner & Beane combination. Both were natural under the circumstances, as Dillon Read had made no agreement, with Blyth or anyone else in 1942 or at any other time, not to bid for Pacific Gas & Electric securities, and Dillon Read had for years brought out an unbroken series of North American financings. Lehman Brothers may have had its eye on this block of stock all along, as it sent a "declination" at the time the Blyth letter of May 11, 1942, was received. I cannot believe that these two accounts were formed as part of a conspiracy with Blyth, going back to May, 1942.

  The formation of the two public sealed bidding accounts just referred to seems to have caught Blyth almost unawares, and the telegram of April 9, 1945, which was sent to a number of the firms to whom the letter of May 11, 1942, had been sent, and also to the additional firms which had participated in the $115,000,000 issue of October 24, 1944, or 173 firms in all, was perhaps hastily composed; in any event, it furnishes government counsel with a slight amount of additional ammunition.It reads:

  "With possibility North American may sell portion their holdings Pacific Gas & Electric common we remind you that in accordance with our letter May 11, 1942 we head an account for private negotiation or competitive bidding & consider you in our account. Please confirm."

  The telegram is just a shade off-color. As there had been no standby account established in May, 1942, there is no reason apparent to me, for Blyth stating that it considered the firms to which the letter had been sent, "in our account." But this is of trivial significance, as many had doubtless written that they would go along; and the part of the telegram which reads "please confirm" indicates clearly that the 173 firms to which the telegram was sent were now being invited definitely to join the account, "for private negotiation or competitive bidding."

  There is no evidence with respect to the replies received, nor, as above stated, is there any evidence of the number of firms which joined the account, or their names or identity or their underwriting strength. Such evidence might have been before the SEC, but it is not in the record here.

  Dillon Read became discouraged and dissolved its account soon after it began to get the firms together; the Lehman Brothers-Merrill Lynch Pierce Fenner & Beane account was not abandoned until April 25, 1945, two weeks later. There is no justification on this record for a finding that the Dillon Read and Lehman Brothers-Merrill Lynch Pierce Fenner & Beane accounts were conspiratorially formed for the purpose of temporarily taking out of circulation some firms which might form or join competing accounts, thus giving aid and comfort to Blyth's alleged "traditional banker" position.

  Bearing in mind Eaton's reaction to the fact that his firm, Otis & Co., had not been given a participation in the $115,000,000 issue of October 24, 1944, it is not surprising that some ugly rumors were soon afloat to the effect that the Blyth account was so large that it was interfering with the formation of competing accounts. Whoever circulated the rumors did so with telling effect, as Blyth was promptly maneuvered into writing to the members of its account on May 3, 1945, that

  "We understand statements have been made that our account is so complete in distributing ability that others have refrained from forming a competing account. This letter is to advise that any member of our account, including yourselves, is free to withdraw at this time and to form or to become a member of another account to bid, without prejudice on future business headed by us. From our standpoint a competing account will be welcome."

  Perhaps it would have been more prudent not to send the letter; but Mitchell, while forthright, is not always prudent. He is not the type artfully to contrive as the chess player who is willing to take hours on end to outmaneuver and adversary. Mitchell's strength lies in barging in and having things out without too much fancy sparring; or at least such is the portrait of him which this record paints. In any event, I think the letter means just what it says, no more, no less.

  We already know the sequel.The Blyth bid was the only one; the SEC rejected it; Blyth refused to bid again unless assured tht there would be at least on more bid; Blyth and Dillon Read bid against one another, and Dillon Read won out.

  Counsel for the firms included in the Pacific Gas & Electric charge of government counsel, relative to the 700,000 shares secondary offering of common stock just commented on, tell me that they had no intimation that there was any issue before the SEC of conspiracy to "stifle or preclude" competition, that the proceedings were in effect ex parte, as the only lawyers present were those designated by North American to represent the successful bidder should the bid be approved, and that I should give no consideration whatever to the "opinion and findings" of the SEC. I do not pass on these matters, as it is clear that nothing said or done by the SEC is binding on me here.

  Before leaving the subject of overly-large public sealed bidding accounts, to which I shall not return, as the evidence does not justify further discussion of this particular part of the plaintiff's charge of an integrated, over-all combination and conspiracy, a final word should be added to pull the Pacific Gas & Electric series of financings together. If ever there was a situation in which a continuing relationship with an issuer had definite and substantial advantages to the issuer it is that of Pacific Gas & Electric. The background, including the state of war with Japan, the Central Valley Project, the Sacramento Condemnation proceedings, the Hetch-Hetchy Project, and serious and disturbing litigation, combined to present a problem of distribution which required delicate handling, and the exercise of sound judgment, by an investment banking firm thoroughly conversant with every phase of the numerous complications involved. It was natural under the circumstances for the management, and for the North American executives as well, to turn to Blyth; and it was equally natural for Blyth to use every competitive strategy at its disposal, to hold on to the Pacific Gas & Electric business, in negotiated underwritten, or public sealed bidding, or any other type of financing which might eventuate.

  Moreover, as testified by Harold L. Stuart, an old hand at competitive bidding, when he explained to me that there was no objective test by which he or I or anyone else could determine that an account was overly-large:

  "Well, it depends on the issue and the market conditions. Looking at anybody else's group I am simply an outsider. I don't know anything about what happens in that group or what their other commitments are, or whether they think the bonds are hard to sell or easy to sell. I would not know anything about anybody else's syndicates, so if I don't know anything about the group I cannot judge whether at the time it was larger or smaller or the participations should be smaller."

  Accordingly, I find that Blyth never deferred to any "traditional banker," made no agreement with other firms as to "successorships," and that it gave no adherence to any "practice" of "traditional banker" or "successorship," nor to the terms of any "code."

  14. Harriman Ripley

  The evidence relative to Harriman Ripley on the "traditional banker" and "successorships" issues requires little comment. Ripley's own testimony shows plainly that the firm made every effort within reason to get business, and that it succeeded in doing so, aften in derogation of the terms of the alleged conspiracy. That it definitely solicited business generally is shown by its booklet "Capital for Industry," which was published and widely distributed in 1944, as a means of attracting new business, and was revised and republished in 1945. This booklet concludes:

  "The Company is thus equipped to place mature judgment, specialized training and broad experience at the service of corporations and other issuers who desire its advice or assistance in obtaining equity capital or in borrowing funds secured by bonds or other obligations. Inquiries from such corporations or issuers are invited."

  There is nothing in the evidence relating to Harriman Ripley which even remotely suggests any disposition not to "upset the applecart," and nothing to justify an inference that there was any "code." Not a single document emanating from the files of Harriman Ripley supplied any quotation applicable to the plaintiff's claim that it adhered to the alleged "practice" of "traditional banker."

  On "successorships" we have the same effort we have found in the case of a few other defendants to cultivate relationships which individuals in the firm had previously formed with issuers, prior to the time they were forced out of their previous employment as a result of the Glass-Steagall Act.

  In this connection, the letter from James H. Perkins, chairman of the board of directors of the National city Bank, to its shareholders, on June 4, 1934, is relevant.It concludes with the statement, "There will be no successor to the City Company." Concerning good will he remarks:

  "Good-will is a nebulous thing. In so far as it is attached to the name of the City Company it cannot be realized on, because the continued use of the name would identify the user with the Bank and that cannot be permitted without control by the Bank, which is forbidden by law. In so far as it may be represented by personnel trained in the investment banking business, such personnel consists of free individuals whom the City Company is not in a position to deliver to a prospective purchaser."

  Several issuer situations, involving Harriman Ripley, have already been discussed, including, National Cash Register,1t Pacific Gas & Electric,2j United Air-lines,3e and United Drug.4d Other evidence discloses Harriman Ripley competing, in derogation of the "traditional banker" term of the alleged conspiracy, for the management of security issues of American Cyanamid, Bell Telephone of Canada, Firestone Tire & Rubber, Price Brothers, Shell Union Oil, and many others; and Ripley testified that when competing price offers are requested by an executive or financial officer of an issuer, "we give it to him," citing examples.

  Only one additional issuer situation, relied upon by counsel for the government, will now be commented on briefly.

  Scandinavian Financings

  The background takes us back to the old Kuhn Loeb "show window," which was in full display in 1929. Under no circumstances would Kuhn Loeb permit it to get around that they were interested in any competitive situation. the scene opens after White Weld, who had brought out a $6,000,000 issue of Norway Municipalities Bank financing in November, 1927, approached James P. Warburg of the International-Manhattan Co. about a prospective $25,000,000 issue. Warburg called on Schiff on May 21, 1929, to ascertain whether Kuhn Loeb would join the group. Buttenwieser's memorandum indicates that the Kuhn Loeb reaction was favorable, but on the understanding that the Kuhn Loeb name was not to be disclosed "unless the negotiations are on an exclusive basis." Warburg had already been advised that "our name was not to be disclosed in any competitive situation" until the competition was over and the group had won out. This is simply another variation of the "show window" policy in operation.

  Accordingly, it seems quite in keeping with what we have already observed that the next document, in which the entire argument of government counsel on the Scandinavian Financings is rooted, turns out again to be a Kuhn Loeb memorandum, dated July 10, 1929. Warburg has again interviewed Schiff; White Weld has another proposal, this time with reference to a proposed issue of ten to twenty million dollars by the City of Oslo, Norway. The part relied on reads:

  "Mr. Schiff advised Mr. Warburg that if cooperation of the International Manhattan Company and White Weld & Co. with us meant real stifling of competition so that this larger group could negotiate with the city on practically an exclusive or at least perferential basis, we would be pleased to have them join with us."

  This is in no manner connected up with Harriman Ripley, nor does the evidence indicate that this Kuhn Loeb "show window" technique was even reported to White Weld. But it runs like a melody through the argument of government counsel concerning events in 1935 and 1945, as though it represented a policy somehow "inherited" by firms who, so far as appears in this record, knew nothing about the conversation in 1929, but who later formed groups to compete for various Scandinavian Financings. As far as I can make out there is no connection whatever between these 1929 conversations and the group formed later.

  On January 16, 1935, a memorandum of agreement between Brown Harriman, Edward B. Smith & Co., Kuhn Loeb, First Boston and White Weld, evidences the formation of an entirely new group to compete for Scandinavian Financings. In this way expenses connected with trips to Europe were shared and it was anticipated that the combined strength of such a group would make a favorable impression upon foreign ministers of finance.The agreement covered many details concerning management, participations, advertising, order of names, treatment of situations involving any "special relationship" or "extraordinary circumstances," the bringing in of "others either here or abroad," and having the negotiations conducted jointly by Brown Harriman and Edward B. Smith & Co. The essence of the agreement is in the following two paragraphs:

  "In order to coordinate the studies involved in determining what, if any, Norweigan, Danish and/or Swedish business may be done in this market in behalf of public or private obligors, Edward B. Smith & Co. and Brown Harriman & Co., Incorporated have agreed to assume the management of a group consisting of themselves, Kuhn Loeb & Co., The First Boston Corporation and White Weld & Co.

  Consistent inquiries from abroad convey the desire, primarily on the part of Norwegian and Danish authorities, to arrange for a number of refunding transactions. The management above mentioned intends to make on behalf of the group a study on the ground at the earliest possible date and seek contact with their correspondents abroad, in the endeavor to ascertain whether such business could be done on practicable terms."

  Blyth was taken into the group on January 20, 1936.

  The competition which followed contributes in no small measure to the disproof of plaintiff's charges, despite the fact that most of the documents were placed in evidence by government counsel. There were three groups after the Scandinavian business. In addition to the Brown Harriman-Edward B. Smith & Co. group, which was made up of six of the defendant firms, as above stated, there were other groups headed by Dillon Read and Lazard, and each of these groups turned out to be a formidable and tenacious competitor. In the Dillon Read group was Lehman Brothers; and in the Lazard group we find Goldman Sachs, Kidder Peabody, Stone & Webster, Field Glore and Harris Hall. Here, indeed, is competition on a grand scale between the very firms which are supposed to have combined together in an over-all conspiracy "to stifle competition."

  The Lazard group won two issues, and the Brown Harriman-Edward B. Smith & Co. group won two issues. In connection with the $17,000,000 20-year External Bond issue of Kingdom of Norway, offered on March 2, 1936, by the Lazard group, an effort was made, on the suggestion of the officials of the enskilda Bank of Stockholm, to merge the Dillon Read andBrown Harriman-Edward B. Smith & Co. groups, but no merger could be effected.

  In the years immediately prior to 1939, as international conditions rapidly deteriorated, there were many negotiations back and forth, some dissension within the groups, a disinclination to be drawn into the submission of competing price bids and so on. The documents furnish government counsel with occasional quotations, but the whole situation is replete with competition quite at variance with the supposed over-all integrated scheme set forth in the complaint.

  In 1945, after the end of World War II, the old group was to some extent reconstituted, and Harriman Ripley, Smith Barney and Kuhn Loeb worked together, the three forming an account on August 21, 1945. They had some success, but were superseded by Morgan Stanley who, in derogation of the alleged "practice" of "traditional banker," where a "satisfactory relationship" existed, took the Danish Government business away, although the Harriman Ripley-Smith Barney group thought they were doing very nicely and had the situation well under control. Despite all this, the Danish loan finally failed to materialize, and Morgan Stanley wasted a fine piece of competitive effort.

  In 1947 there was vigorous competition for a Norwegian bond issue. This time the successful account was comanaged by Kuhn Loeb, Harriman Ripley, Lazard and Smith Barney, each with a 10% participation; Blyth, Kidder Peabody, Drexel, Dominion Securities corp., and Ladenburg Thalmann had 5% each, and White Weld and Hallgarten 4.25% each.Eastman Dillon and Morgan Stanley lost out.

  I find that Harriman Ripley never deferred to any "traditional banker," nor requested any other firm to defer to it as "traditional banker"; that it made no agreement with other firms as to "successorships," and that it gave no adherence to any "practice" of "traditional banker" or "successorship," nor to the terms of any "code."

  15, 16 and 17. Stone & Webster, Harris Hall and Union Securities

  Nothing of consequence was introduced against these three peripheral defendants. Only 13 documents were introduced against Stone & Webster during the entire trial, 10 against Harris Hall and 4 against Union Securities.

  I find that neither Stone & Webster, Harris Hall nor Union Securities ever deferred to any "traditional banker," or requested any other firm to defer to it as "traditional banker"; and that neither of said firms made any agreement with other firms as to "successorships," nor gave adherence to any "practice" of "traditional banker" or "successorship," nor to the terms of any "code."


  Alleged Conspiratorial Opposition of the Seventeen Defendant Banking Firms to "Shopping Around," and to the Campaign for Compulsory Public Sealed Bidding; and the Alleged Adoption of Devices to Sabotage SEC Rule U-50 and Compulsory Public Sealed Bidding in General

  There is considerable evidence in the record on this subject, which was in the beginning said to be an important part of the government case, as it was supposed to lend support to the "traditional banker" concept, and also to constitute substantial proof of the way in which the 17 defendant banking firms carried out some of the essential terms of the conspiratorial scheme.

  The charge against "the defendants" on this phase of the case is comprehensive and has many aspects. Boiled down to essentials, government counsel undertook to prove: (1) that "the defendants" were opposed to public sealed bidding generally; (2) that they agreed "to prevent, restrain, minimize, and discredit the use of competitive bidding, private placements, agency purchases, and agency sales" by various means, and by "seeking to prevent the adoption by duly authorized Federal and State administrative agencies of rules and regulations requiring security issues to be sold at competitive bidding," and that they sought to "induce" and "coerce" issuers not to resort to competitive bidding, private placements or agency transactions; and (3) that "the defendants" further agreed to "eliminate and prevent" competition for security issues offered at competitive bidding and "to circumvent" or sabotage the regulatory orders of Federal and State administrative agencies requiring competitive bidding by "forming overly-large" public sealed bidding accounts, and by the elimination of potential competing accounts through the "device" of inducing leading investment bankers to join defendants' accounts by offering them substantially equal participations with that of the manager, and by reducing substantially or eliminating defendants' management fees.

  As part of this phase of the over-all, integrated conspiracy and combination, "the defendants" are further charged with entering into an agreement to induce institutional investors to refrain from making bids for security issues offered at competitive public sealed bidding. this will be the subject of comment in Part VII of this opinion, relating to the so-called "Pink" agreement.

  We need not tarry ovver the charge relating to private placements and agency transactions. This has been over-whelmingly disproved. Indeed, the effort to sustain this part of plaintiff's allegations was no more than perfunctory. The only firm thoroughly committed to opposition to private placements appears to be Halsey Stuart, which apparently would have most if not practically all security issues disposed of by public sealed bidding, a field in which Halsey Stuart, with its large capital, specialized pricing experience and knowhow, has met with such conspicuous success.

  As with every other feature of this complicated case, we shall find that here again there was no joint action whatever by any conspiratorial combination. the views expressed by individuals connected with a few of the defendant firms, and the policies adopted by some of them, with respect to competitive bidding and "shopping around," are conceded to have been formed in good faith.It is not disputed that the views thus expressed were the genuine views of those who formulated them; nor is it claimed that they lack merit or were part of any artificial camouflage or pretense.Indeed, there is proof that these same views were shared by many non-defendant investment banking firms not named as co-conspirators, and by issuers and investors as well.

  General Views on Competitive Bidding and the Advantages to Issuers Arising Out of Continuing Banker Relationships

  Fundamentally, the contentions of government counsel on this and other phases of the case stem from a misconception of the investment banking business. And yet the advantages to an issuer, which are incidents of a continuing relationship with a good investment banker, seem too obvious for comment. In every business the customer feels that there are cogent reasons why he should continue with the firm which has rendered good service in the past.But with a series of security issues, the sving in the time and labor of the officers and employees of an issuer, which would have to be spent in teaching a new investment banker the intricacies of the business, and the financial set up of the company, are a matter of real consequence; and it must not be forgotten that many of the matters to be discussed are of such a character that company officials desire to have such conversations only with those whom they trust, and in whose integrity and competence they have complete confidence.

  The views expressed by Harold Stanley in his memorandum of November 29, 1939, for submission to the TNEC, make sense to me; the wonder is, why did the TNEC fail to accept it and make it part of the record of their proceedings.1u Whenever an investigation body, thought to have positive views on a subject, refuses to hear the other side, the effect may be, at least to some extent, to impair the validity of the very proceedings themselves. In view of the failure by plaintiff to produce in this adversary proceeding any convincing testimony of the domination of even a single issuer by any one, or all, or any combination of the defendant firms, it is interesting to read Stanley's denial of "banker domination," and his forthright challenge on the subject, which follow:

  "One critic has recently gone so far as to say that, even though competitive bidding has some disadvantages, it should be made universal because it is the only way in which companies can be freed from 'banker domination.' Whatever may have been said pro and con about the existence of so-called 'banker domination' in the past, the truth is that it simply does not exist to-day, and any contention to the contrary must be based only on ignorance or wilful misinterpretation of the facts. Allegations of 'banker domination,' like those of the 'spider web' theory of control have been repeated so often and arbitrarily, and so fancifully, that they shape the thinking on economic questions of many well-meaning and intelligent citizens who have never stopped to analyze the matter or who have had little opportunity to form their own views about industry at first hand. For the most part such talk has been advanced by persons who have had no practical experience in banking or in industry and by persons intent on creating sentiment for the abolition of private enterprise."

  Morgan Stanley and Kuhn Loeb had opposed competitive bidding for years and had refused to submit sealed bids, perhaps with some exceptions in the case of Kuhn Loeb; and representatives of each had insisted on the advantages which accrue to issuers from continuing banker relationships. As early as October 25, 1922, and long prior to the ruling with respect to equipment trust certificates, Kuhn Loeb had submitted a lengthy memorandum to the ICC on "The Marketing of American Railroad Securities," opposing compulsory public sealed bidding. Individuals connected with a few of the other defendant firms had expressed somewhat similar views.Edward B. Hall of Harris Hall took the same position in a speech he made as president of The Investment Bankers Association at the Bond Club of New York on April 21, 1937. This had nothing to do with any conspiracy.

  Without attempting again to consider the evidence applicable to each of the 17 defendant firms, it will suffice to say, that as to some there is no proof in the record that they had formulated any policy or entertained any views on the subject, and as to others, the stipulated static data prove that they actively managed and participated in numerous public sealed bidding accounts, long before public sealed bidding was made compulsory as to certain types of securities of certain classes of issuers hereinafter referred to.

  The Eaton -- Young -- Halsey Stuart Campaign

  The less said about the fight for compulsory public sealed bidding the better. It is an unsavory subject.Success, to the extent covered by SEC Rule U-50, effective May 7, 1941, concerning the securities of issuers affected by the Public Utility Holding Company Act of 1935, and by the ruling in Ex parte 1581v by the ICC, effective July 1, 1944, relative to debt issues of railroad securities, came partly as the result of arguments addressed to the merits, but partly also, and in no small measure, as the result of a campaign of misrepresentation and pressure, political and otherwise, described by Young as "putting the heat on," in which revenge for real or fancied wrongs played no small part.

  The idea perhaps originated with the loss of the Insull business by Halsey Stuart, which in the 1925-1931 period had amounted to the amazing total of $2,250,000. Whether or not such was its origin, the campaign was in full swing shortly after the purchase by Halsey Stuart and Otis of a $30,000,000 issue of Chesapeake & Ohio Refunding and Improvement Mortgage Bonds on December 10, 1938. The ingenuity displayed by Eaton and Young, in outwitting Harold Stanley and Elisha Walker, deserves description, but I shall pass it by. Harold L. Stuart was unaware of much that was done, and later believed statements that Morgan Stanley and Kuhn Loeb had made a bid, whereas the proof before me establishes in the clearest possible manner that they did not.

  Thereafter, in one financing after another, the pressure campaign of "putting the heat on," forced one issuer after another to resort to public sealed bidding, despite the wishes of the management to negotiate with Morgan Stanley. The difficulty was that there was no forum at which the misstatements of fact could be exposed, and the prospect of a public exchange of vituperation with Eaton and Young was far from alluring, to say nothing of the distaste for threatened stockholders' suits, telegrams to political figures in high places, new releases and magazine articles.

  It seems a pity that the whole subject could not have been threshed out in a manner more in keeping with its importance to our national economy, rather than in such an atmosphere of bitter invective.While there is doubtless much to be said on each side, and the subject is far more difficult and complicated than one unfamiliar with such matters would at first suppose, it is clear to me that it is no part of my function to pass on the merits of the controversy over competitive public sealed bidding; and I shall not do so.

  Morgan Stanley and Kuhn Loeb lost a $12,000,000 issue of Cincinnati Union Terminal, which came out at public sealed bidding on February 14, 1939, after Eaton and Young had "put the heat on." Naturally, under the circumstances, Morgan Stanley and Kuhn Loeb, who were working together as a group, submitted no bid; to have done so would merely have played into the hands of their adversaries.But other defendant firms did submit bids. Lehman Brothers, with Eastman Dillon in its account, won. first Boston, whose account included Kidder Peabody, was second; and Halsey Stuart and Otis submitted the lowest bid.

  Morgan Stanley commenced a particularly complicated negotiation with Terminal Railroad of St. Louis on February 9, 1939; there were frequent meetings with the Finance Committee and counsel, as a result of which the proposed issue was formulated and the various documents prepared. But nothing was of any avail against the hundreds of telegrams to directors, Interstate Commerce Commissioners, political figures, life insurance executives and the presidents of the 16 guarantor railroads. The old misrepresentations were renewed, press releases given to the Associated Press, Time Magazine and newspapers; and the management gave in.

  The most curious feature of the whole affair is that it is supposed to be some proof of conspiracy, when it is shown not only that Morgan Stanley submitted no bid, but also that it politely refused to accept from the Terminal Railroad of St. Louis the compensation offered for its services rendered in formulating the plan and shaping up this complicated transaction. To have accepted compensation when none was legally due, would have furnished Eaton and Young with another weapon to use against Morgan Stanley in the next engagement, which followed shortly thereafter.

  Had the offer been accepted, the amount of compensation paid would doubtless have been large, and perhaps government counsel expected this factor to affect my judgment. A judge, when on unfamiliar ground, must be careful not to infer wrongdoing simply because the figures in dollars are so much higher than he has been accustomed to deal with. When, in the early stages of the trial, evidence was offered of the commissions or fees paid to J. P. Morgan & Co. in connection with the Anglo-French Loan in 1915, without any proof of what had been done to warrant the payment of such amounts, I inquired of counsel for the government whether it was claimed that the amount was exorbitant, as one of the allegations of the complaint charged that an effect of the conspiracy was that exorbitant spreads had been foisted upon issuers.As soon as counsel for the government were informed that I would have to be guided by expert testimony on such a subject, of which I knew nothing, the matter was taken under advisement, and the charge of exorbitant spreads was later withdrawn.

  Eaton, Young and Halsey Stuart pursued the same tactics in connection with other security issues in 1939, 1940, 1941 and 1943; but there is no occasion to follow the details.

  As we shall see when we come to the informal conference at the SEC, attended by those invited to express their views relating to the then proposed Rule U-50, Stanley and Stuart had a conversation just after the conclusion of one of the sessions, which Stuart describes in his testimony in this case, as follows:

  "The Witness: I think I said to this effect: 'Can't you see by the attitude of the Commissioners that they are in favor of competitive bidding, because all you fellows that have been up there before them today, they have put you on the defensive?' and he said, 'No, I don't think so,' he said, 'I think we are going to beat it' I think that was it".

  Stanley would not have felt so confident had he known that Stuart had, according to his testimony before me, been assiduously conferring with the SEC commissioners and members of the staff, over a long period of time, explaining the virtues and advantages of public sealed bidding. Stuart knew that his persistent and long continued efforts had succeeded in impressing the very men who, thereafter, were not convinced by by the arguments made at the open hearing by Stanley and the other investment bankers, defendants, and nondefendants, and institutional investors, who were in attendance in response to the invitation to come and express their views.

  It will serve no useful purpose to trace further the trail of the Eaton-Young-Halsey Stuart campaign, except to say that after their initial success before the SEC with Rule U-50, this combination redoubled their efforts until they were rewarded by the much more significant victory evidenced by the ICC ruling in 1944.1w

  Responses to Requests from SEC to Express Views Relative to Proposed Rule U-50 and Further Amendments to Rule U-12F-2

  On December 28, 1938, pursuant to authority found in the Public Utility Holding Company Act of 1935, the SEC promulgated Rule U-12F-2, effective March 1, 1939. It contains elaborate provisions, and was amended from time to time. We are concerned only with a reference therein to a requirement that, under certain states of fact, no payment of an underwriter's fee would be approved where "there is liable to be or to have been an absence of arm's-length bargaining with respect to the transaction." In the course of time various applications for exemption were made to the SEC, and these were occasionally granted on condition that there be "shopping around" among a number of investment banking houses, rather than a negotiation solely with the firm which had brought out prior issues. This proved in practice to be unsatisfactory to all concerned. Accordingly, on March 4, 1940, the Public Utilities Division of the SEC sent out form letters, enclosing a copy of Rule U-12F-2, stating "We are * * * willing to consider techniques which may be less burdensome from the standpoint of the issuer and more effective from the standpoint of the Commission," in meeting the requirement of competitive conditions and arm's-lenth bargaining.The numerous investment bankers to whom this letter was sent were invited "to submit not later than March 18, 1940, a written memorandum," relative to a question asking for suggestions concerning methods which might be used to attain the desired end. The letter itself described "one method, in addition to the present 'affiliate' rule * * * has been a requirement of proof that the issuer has 'shopped around' among investment bankers for the most favorable terms." Another method is the possible "use of sealed bids." The letter adds, "There may well be others."

  Incredible as it may seem, the written replies to this formal invitation by an administrative body of the United States Government, asking citizens to express their views on a subject which vitally concerned their property interests, were offered in evidence by government counsel as some proof of the existence of the conspiracy charged in the complaint, despite the fact that it is not questioned but that the views expressed were honestly held and were submitted in good faith.

  Hall, of Harris Hall, wrote:

  "We think that 'shopping around' for terms is a particularly unintelligent approach to the question which has been asked."

  A long and well reasoned memorandum by Blyth has this to say:

  "This suggestion ["shopping around"], if it is properly understood, ignores the realities involved in doing business and is an ineffectual and unnecessary procedure."

  While many of the defendant firms submitted no memoranda, others pointed out tha the naming a price "far in advance of the offering date leds to unrealistic price offers," and that one could not tell what was being "shopped around," as the issue might be in the formative stages of being shaped up. Certain deposition testimony on the subject is to the same effect, with greater detail.

  My own conclusion is that the machinery of "shopping around," which favored the less scrupulous bargainer, had little to commend it.

  The next step was another formal invitation to attend an open conference on January 27, 1941, at the SEC office in Washington, this time to express views concerning the contents of a Report of the Public Utility Division Staff, entitled "The Problem of Maintaining Arm's-Length Bargaining and Competitive Conditions in the Sale and Distribution of Securities of Registered Public Utility Holding Companies and their Subsidiaries," which made a strong plea for compulsory public sealed bidding, and at least to some extent must reflect the good work Stuart had been carrying on for some time with some of the commissioners and members of the staff, as he testified.

  Some carefully prepared memoranda were submitted expressing various views. Dillon Read thought that the SEC "has become a strong advocate" and should defer action until the matter could be taken up at a public hearing "before committees of Congress." A committee report of the NASD to the Board of Governors, expressed the view that the proposed action "is a step toward the complete control by government of the private capital market." Significantly, on the conspiracy issue, this report was made by a committee composed of Francis Kernan, Jr., of White Weld, the chairman, and William H. Brand, of the Securities Co. of Milwaukee, Sidney P. Clark of E. W. Clark & Co. of Philadelphia, Albert H. Gordon of Kidder Peabody and Ralph Hornblower of Hornblower & Weeks.

  A large number of investment bankers, from defendant and non-defendant firms, representatives of insurance companies and others attended the hearing. They were urged to make themselves comfortable, "unbutton their vests," "put their feet on the table," "and talk in the freest possible fashion." the commissioners who conducted the hearing would doubtless be as much surprised as I was, to learn that the sentiments thus frankly expressed, pursuant to formal invitation, constitute no small part of the evidence offered on this trial on the competitive bidding issue.

  What witnesses before investigating bodies, administrative agencies or elsewhere, may say or do in carrying out an illegal scheme or conspiracy may of course be used, and should be part of the evidence proffered in a subsequent court proceeding, in which the existence of such illegal conspiracy is an issue. But here we are dealing with concededly honest expressions of opinion, in response to an invitation from public officials to state views on an important public question, with respect to which there was ample room for honest difference of opinion, on the merits. The witness or speaker, whether or not under oath, is placed in the position of remaining silent, telling the truth about his thoughts on the subject under consideration, or pretending to agree with what he thinks the public officials want him to say.If the exercise by American citizens of their constitutional rights in expressing their honest views on public questions vitally affecting their economic interests, can thus be used against them on a conspiracy charge in an anti-trust suit, whither are we bound? It is all well enough for government counsel to concede that the individuals in question had a right to express their views; the fact still remains that, if this procedure is to be consistently followed, many will hesitate to come before such public bodies and express views at variance with what is considered, perhaps erroneously, likely to be, or to become, the official policy. The purpose of free speech is to bring enlightenment and to insure our future welfare by forthright discussion of any and all matters affecting personal liberties and property rights. One of the surest ways to weaken and disintegrate these precious liberties, and to discourage communication between a citizen and his government, is to encourage such procedure as was here adopted in an attempt to bolster up a charge of conspiracy.

  Alleged Overly-Large Syndicates and Other "Devices" to Sabotage Public Sealed Bidding

  While government counsel claim that there were other overly-large syndicates, the discussion of Pacific Gas & Electric1wa will suffice. In fact there were no such overly-large syndicates formed by any defendant or group of defendants.

  The claim that participations were given equal to those of the manager, and that the management fees in public sealed bidding transactions were considerably less than those paid in negotiated transactions, and that these were "devices" adopted by "the defendants" in consummation of the alleged illegal enterprise, finds no other support than the misconception of the way investment bankers function, which has already been referred to.It will suffice to refer to what has already been written in Part I of this opinion.

  But what about the plight of the little fellow? Unfortunately for him, the record shows that compulsory public sealed bidding has made the big firms bigger, and the little fellow is worse off than he was before.This was predicted by Stanley and by others; but to no avail.Government counsel claim that this has no relevance to the case, because the Sherman Act was never intended "to hold an umbrella" over the little fellow, or the inefficient, as a protection against competition by those more favored by nature or by circumstance. They are right about this.

  In the final triennial, 1947-1949, Halsey Stuart ranked No. 1, with 36.60% of the dollar volume of public sealed bidding financing. the small spreads above referred to have reduced the participation of the smaller dealers and local investment bankers. Under present day conditions the public sealed bidding accounts provide few securities for the small dealers to sell.

  The whole process of so regulating an industry that everyone will have a reasonable opportunity to secure his so-called "share of the business" is not as simple as it may appear to some, which is only to say that the approach to a solution of such a problem should not be by way of the courts, in a so-called conspiracy case, but within the framework of the constitution of a free people, entitled to have their voices heard.


  The "Insurance Agreement," Alleged to Have Been Made on December 5, 1941, and "Approved" on May 5, 1942

  This subject is introduced by paragraph 44D(4) of the complaint which alleges:

  "44. The conspiracy has consisted of a continuig agreeement and concert of action among the defendants, the substantial terms of which have been that defendants:

  * * * * * *

  "D. Agree to eliminate and prevent competition for security issues offered at competitive bidding and to circumvent regulatory orders of Federal and State administrative agencies requiring competitive bidding in the sale of security issues, among other means --

  * * * * * *

  "(4) By inducing institutional investors to refrain from making bids for security issues offered at competitive bidding in return for the preferential allotment to such investors of substantial blocks of the securities purchased by defendant banking firms."

  The "agreement" is alleged in great detail in paragraph 45C of the complaint as follows:

  "45. During the period of time covered by this complaint, and for the purpose of forming and effectuating the conspiracy, the defendants, by agreement and concert of action, have done the things they agreed to do as hereinbefore alleged, and, among others, the following acts and things:

  * * * * * *

  "C. On or about December 5, 1941, at New York City, representatives of most of the defendant banking firms met with representatives of Metropolitan Life Insurance Company, The Prudential Insurance Company of America, The Equitable Life Assurance Society of the United States, New York Life Insurance Company, Mutual Life Insurance Company of New York, and Home Life Insurance Company, and entered into an agreement (herein referred to as the 'insurance agreement'). At New York City on May 5, 1942, at a subsequent meeting attended by representatives of most of the defendant banking firms and a larger number of life insurance companies (hereinafter referred to as the 'insurance companies'), the insurance agreement was approved and adopted by such representatives. The aforesaid meetings, and similar meetings, held during the months of October and November, 1941, were held at the invitation of the Superintendent of Insurance of the State of New York, which invitation has been induced by the defendnts. Under the terms of the insurance agreement, the defendant banking firms and the insurance companies have concertedly done and now do, among other things, the following:

  "(1) Defendant banking firms advise, influence, and induce issuers to set up their security issues to meet the requirements and preferences of the insurance companies as to price, size of issue, type of security, yield, and other terms.

  "(2) Defendant banking firms have retained for direct or group offering to the insurance companies approximately 50 percent of every issue in which such companies indicate an interest, and have determined the amount to be so offered to each of such companies by giving weight to two factors: first, the size of such companies, as determined by their assets, and second, in the case of refunding issues by giving weight to the amount of securities which any individual insurance company would lose through the retirement of the outstanding issue.

  "(3) Defendant banking firms charge the insurance companies the full public offering price for all securities sold to them under the insurance agreement.

  "(4) Defendant banking firms refrain from acting, and discourage other investment bankers from acting, as agent for institutional investors in agency purchases of securities.

  "(5) The insurance companies, individually and collecively --

  "a. Prepared and furnished to defendant banking firms a preferential list of 27 life insurance companies owning 87.8 percent of the total admitted assets of all life insurance companies in the United States, to which direct or group allotments under the insurance agreements are made by defendant banking firms.

  "b. Refrain from bidding for the purchase of security issues offered for sale at competitive bidding.

  "c. Discourage issuers from offering security issues for sale at competitive bidding, and support and cooperate with the defendant banking firms in opposing all extensions of the use of competitive bidding.

  "d. Refrain from soliciting issuers to sell their security issues through private placement, and reduce substantially the volume of their security issue purchases through private placement.

  "e. Refrain from making agency purchases of security issues.

  "f. Reduce substantially their purchases of securities from investment bankers not parties to the insurance agreement.

  "(6) A special committee composed of members named by the parties to the insurance agreement was organized and other persons were employed (a) to maintain liaison between defendant banking firms and the insurance companies, (b) to receive and investigate complaints against violators of the insurance agreement, and (c) to report the results of its investigations to the insurance agreement parties."

  That an agreement so ambiguous and unworkable should have been entered into by the officials of leading life insurance companies and investment bankers of wide practical experience, at the invitation of the Superintendent of Insurance of the State of New York, seems improbable on the face of the charge as made. We shall find, despite the 79 documents introduced in evidence on this issue, that no competent evidence whatever was offered to prove that such an agreement was made; circumstantial inferences from some of the documents indicate that no agreement of any kind was made; and the stipulated static data indicate that the subsequent course of events followed no such pattern.

  The situation presented is simple; and it becomes complicated only because counsel for the government refused to call any of the 40 or 50 people present at either or both of the conferences referred to, in spite of repeated assurances that witnesses would be called.The record shows that many if not all of them were alive and available. Instead, following the plan of a "documentary case," the invitations attend, the replies, and a host of miscellaneous papers were placed in evidence, no single one of which, or any number of them together, proved the making of an agreement, but indicated the contryary. Because of the absence of direct and competent proof, a finding that no such agreement was made would not be justified, and I shall do no more than record the failure of plaintiff to prove the making of the agreement as alleged.

  On September 29, 1941, a $90,000,000 issue of American Telephone & Telegraph Debentures ws bought in at public sealed bidding by three large life insurance companies, the Metropolitan, Mutual and New York Life, whose bid was higher than those submitted by a Morgan Stanley account, which came second, and Halsey Stuart and Mellon Securities. Lehman Brothers, Glore Forgan and Eastman Dillon were in the Halsey Stuart account and several other defendant firms were in the Morgan Stanley account.

  The first in the sequence of events which followed, according to the documents in evidence, was a telephone conversation on the morning of September 30, 1941, between New York State Superintendent of Insurance Louis H. Pink and Emmett F. Connely, then president of the Investment Bankers Association. There having been some comment in the newspapers, Connely apparently called Pink, and the conversation was followed by a letter from Connely asking for an expression of opinion as to whether or not the insurance companies were permitted by law to make such purchases. Upon investigation it was found that the insurance companies were clearly within their rights, and an opinion to that effect was rendered by Pink's counsel, and the correspondence was published in the press.

  In his letter to Connely, dated November 7, 1941, Pink stated:

  "Some objection has also been raised in the insurance field because the large life commanies are able to combine and purchase practically all of the securities to the disadvantage of the small companies."

  This is the first time that this question appears in any of the documents; and the record shows that, in the meantime, Pink had called a meeting of insurance company executives on October 15, 1941. No witness testified to what occurred at that meeting, nor do the documents contain any statement of who were present or what was said.Pink thereupon appointed a committee of insurance company officials, with James A. Fulton of the Home Life, one of the smaller companies, as chairman, to look into the matter; and it was conceded by government counsel, and it is the fact, that Superintendent Pink was vested with power by law to explore the problem thus presented. Pink called a meeting of this committee on November 25, 1941, and a meeting of the representatives of 31 or more insurance companies on November 26, 1941. Again the record gives no inkling of what occurred at either meeting.

  The next move by Pink was a letter to various investment bankers and insurance company officials calling a meeting to he held at the offices of the New York State Insurance Department, in New York City, on December 5, 1941, "to talk over the problem of life insurance investments." Much time was consumed during the trial on the subject of who was present. As to all but a very few there was no doubt; but as to the others there is little to guide me, which is explainable, as the attack on Peral Harbor came only two days later. If requested I shall make findings in accordance with comments on the record made by me as the various voluminous answers to interrogatories, and answers to demands for admissions were being offered in evidence and considered.Representatives of several non-defendant firms, including Halsey Stuart, and numerous executives of life insurance companies, including Beebe of the Mutual, Ecker of the Metropolitan, Stedman of the Prudential and Harrison of New York Life, in addition to Fulton of the Home Life and Superintendent Pink, and others, were present.It is conceded that no representatives of Eastman Dillon, Glore Forgan, Harris Hall, Kidder Peabody, Lehman Brothers, Stone & Webster, White Weld or Union Securities attended any of the meetings or had anything whatever to do with the alleged "insurance agreement."

  I find as a fact that none of the meetings were induced by "the defendants," as alleged in the complaint, or by any of them.

  Again, the record is silent as to what was said at the meeting of December 5, 1941. Such meager references to this meeting as are found in the documents in evidence would indicate that no agreement whatever was made by or between any of the participants. Government counsel repeatedly assured me tht witnesses would be called, but none was called, despite the fact that on November 20, 1951, I signed a subpoena ad testificandum addressed to Donald C. Slichter of the Northwestern Mutual. Government counsel finally decided not to call him or anyone else.

  In the beginning, Fulton had requested Sidney Mitchell of Bonbright, an alleged oc-conspirator, to work with his committee of insurance officials, so that the members of that committee might have an investment banker with whom to consult. At some time prior to May, 1942, Coggeshall of First Boston was requested by Fulton to take Mitchell's place, when Mitchell was called to Washington; and there are some letters passing thereafter between Coggeshall and Fulton.

  Finally, Pink called another meeting for May 4, which was put over to May 5, 1942, and certain representatives of life insurance companies and defendant and non-defendant investment banking firms again conferred with Pink. We are not informed as to what took place.

  After the meeting and on May 14, 1942, Fulton made an extensive report to Pink, copies of which were sent to those who attended the meetings; and there the matter ended. One of Pink's later letters states, "While no definite action has been taken, greater effort is being used by everyone to distribute such investments as are offered more equitably and more wiedly." Fulton's report contains this sentence:

  "It should be emphasized that neither at this meeting [the first one with the insurance company officials] nor at any of the subsequent conferences which were held, were any agreements or understandings arrived at that would in the slightest degree restrict the freedom of action of anyone."

  The fact that, after the meeting of May 5, 1942, Coggeshall sent out a list of life insurance companies, ranked by assets, which had been prepared by Mitchell of Bonbright, is of little significance, particularly as the stipulated static data indicate that life insurance companies continued to bid for security issues, and no pattern of uniform or consistent action on the part of investment bankers or life insurance companies followed in the wake of these meetings.



  There are many features of this extraordinary and perhaps unparalleled case which have not been commented on; the issuer situations referred to run into the hundreds; and my effort to channel the proofs into an area composed of the security transactions of only 100 issuers, proved wholly futile. But it is believed tht every significant feature of the case, and each of the principal contentions of government counsel, has been commented on sufficiently to disclose the state of the evidence and my findings of fact and legal conclusions relative thereto. And this has been done in so complete a manner that any errors on my part readily be discovered.

  Administrative Features and Statistics of the Trial

  Mfour pre-trial orders1y indicate my efforts to clarify the issues and simplify the trial, to the extent that preliminary clarification and simplification were possible. This reduced discussion on the admissibility of evidence to a minimum. They system of marking exhibits demonstrated its usefulness in a variety of ways and worked well. My notes, made during the progress of the proceedings in open court, with elaborate cross-references, afforded a fairly complete and accurate digest of the evidence, documentary and testimonial, and served as a ready means of locating exhibits and eliminating futile discussion of what had taken place. They filing and cross-reference system installed in my chambers made the various original exhibits, charts and statistical tables, memoranda, and miscellaneous affidavits, motion papers, notices and lists, at all times available without delay. The direction that counsel for the government present plaintiff's evidence seriatim, according to an arrangement satisfactory to them, saved much confusion. The difficulties caused by thus dispersing the various excerpts from the deposition testimony, taken in the pre-trial discovery proceedings, were overcome by the presence of separate volumes containing the numberous depositions, which were thus at all times at hand, when I desired to read the deposition of any particular witness in sequence.

  In many anti-trust cases thousands of documents, such as invoices or reports, may readily be tabulated and the net results observed without reading each exhibit. Here the mass of documents referred to innumerable conversations and transactions which could only be pieced together after a methodical reading of each, and the identification of the official positions and connections of those whose names appeared in the various letters, memoranda, diary entries, telegrams and reports. I could find no way to avoid this; and the numerous colloquies, which at first glance seem unduly to increase the size of the transcript, were the only means I could hit upon to make it possible for me intelligently to weigh and determine the probative value of the thousands of items of documentary evidence.

  Nothing whatever was admitted "for what it was worth," and it is only fair to counsel for the government to say that nothing was offered on the basis of this vague formula. On the other hand, it must be frankly admitted, that in a complicated conspiracy case the presiding judge has little alternative to going along with counsel, when assured tht the proffered evidence will be connected up later and will serve in the end to complete the "mosaic" of joint action and conspiracy.In my judgment, the only hope of cutting these conspiracy cases down to size, lies in the exercise of a sound discretion by the Department of Justice. The trial judge, desirous of doing full justice to all parties, can hardly lop off particular segments of the case at a time when it is impossible to be sure that they will or will not, in the end, fit together.

  The connecting statements at the end of the government's case were indispensable. Without them I should have had no other alternative, as a practical matter, than to compel the defendant firms, perhaps with the exception of the peripheral ones, to go on with their defense; and this might well have, quite unnecessarily, prolonged the trial for another two years.

  Plaintiff filed its 56-page complaint on October 30, 1947; answers of all defendants, denying the material allegations and totalling 213 pages, were filed on March 17, 1948. In the three years which elapsed prior to the opening of the trial itself a total of 28 days of pretrial hearings were held, the transcript of which occupied 1709 printed pages.

  The great quantity and variety of matters presented to the Court at these extensive pre-trial hearings are generally described in the opinion filed with Pre-Trial Order No. 2 on May 25, 1950, 10 F.R.D. 240. In summary, counsel for the government took 21 separate depositions, at one of which the Court presided; these depositions were taken on 80 separate days from February 16, 1948 to May 22, 1950, and occupied 6,848 printed pages of transcript. In addition during this period approximately 10,640 documents consisting of some 43,252 pages, were submitted by counsel for the government to the defendants for authentication and were printed by the parties. There were also served and filed by the various parties some 26 separate demands for admissions and groups of interrogatories which, together with the 192 objections and responses thereto, totalled 3864 pages.

  The trial itself opened on November 28, 1950, and continued for a total of 309 courtroom days, through May 19, 1953. The Court also held off-the-record "powwows" with all counsel on 25 separate days. The stenographic trial transcript constituted 23,962 printed pages, or between 5,000,000 and 6,000,000 words.

  Some 4469 separate documents, totalling 20,474 pages, were included in the exhibits introduced in evidence or marked for identification (other than stipulated date). There were also introduced in evidence as "plaintiff's and defendants' exhibits" extraordinarily extensive and detailed stipulated statistical and other data constituting 10,168 sheets or pages. An additional 2967 pages of similar material were marked for identification. Thus all documents and stipulations introduced or marked at the trial came to a total of 33,609 pages, which, with the stenographic transcript, result in a trial record of some 57,571 pages in all.

  After the filing of the complaint and prior to the submission of final briefs, the Court was required to consider some 196 pre-trial and interim motions, briefs and memoranda, as well as 376 separate charts and tables prepared from stipulated ata by the various parties. This pre-trial and interim material came to a total of 3846 pages. In addition, final briefs and reply briefs of all parties amounted to a total of 3247 pages. A grand total of 597 separate motions, briefs, memoranda, charts and tables thus have been submitted to and considered by the Court, consisting of some 7093 pages.

  Altogether there have been printed in connection with this litigation from start to finish approximately 100,000 pages of material, and the Court has been required to consider as well some 5000 additional pages of unprinted motions, affidavits, memoranda and similar matter.

  Summary, Rulings on Motions and Dismissal

  The seventeen defendant firms have all done business in much the same way, as occurs in any industry. But each has followed its own course, formulated its own policies, and competed for business in the manner deemed by it to be most effective, in view of its history and background, its standing in the industry, its capital, relatively large or small, its own particular business affiliations and contacts, the capacities of its own officers or partners and its own personnel as individual human beings, and its own facilities for the distribution of securities. Some specialize in debt issues, some in flotations of common stocks; some depend especially upon participations and some do not. Obviously, each of them cannot compete for the management of every security issue. No one of them has enough trained men or sufficient capital even to compete for any great number of issues at the same time. To attempt to do so would result in complete failure.

  Except for those instances where practically the entire industry developed a functional device to enable its members to compete for the financings of issuers, as with the syndicate system, which has for many years been recognized as the American way of bringing out new issues of securities, or, the defendant firms or individual members thereof, with some exceptions, genuinely and in good faith held the same views, as in the case of the controversy over compulsory public sealed bidding by regulatory fiat, these seventeen defendant banking firms went their own several and separate ways. If they had in fact acted in combination or as a unit to divide the business among themselves, and to form a monopoly vis-a-vis the other firms in the industry, as alleged, the pattern of such combination, no matter how cleverly disguised or concealed, must surely have emerged, after such prolonged and continuous scrutiny as has gone on in this case for almost three years. But it did not.

  Government counsel at no time disputed or sought to minimize the burden resting upon plaintiff to establish joint action by the defendant banking firms, consciously pursuing the lleged plan or scheme in concert.At no time was I urged by government counsel to find conspiracy, unless convinced that an actual conspiracy had been formed and was in operation. Accordingly, I have weighed the evidence in light of the conceptions of conspiracy urged by government counsel and in terms of the doctrines of conspiracy laid down by the Supreme Court.1z

  I have come to the settled conviction and accordingly find that no such combination, conspiracy and agreement as is alleged in the complaint, nor any part thereof, was ever made, entered into, conceived, constructed, continued or participated in by these defendants, or any of them.

  Since there was no combination, the monopoly charges fall of their own weight.

  Many findings of fact and conclusions of law are stated in this opinion. Within 60 days after the filing thereof, the parties may submit for my consideration further proposed findings of fact and conclusions of law, in accordance with this opinion and supplemental thereto.

  The motions to connect, and further to amend the complaint, are denied; each of the several motions to dismiss the complaint is granted, and the complaint is dismissed as to each defendant on the merits and with prejudice.


  Summary Description of Statistical Compilations, Tables and Charts

  Pre-Trial Order No. 1 made provision for the establishment of the accuracy of statistical compilations through consultation and agreement among counsel, in lieu of the tedious proof of statistical facts in the course of trial. When, in compliance with the Pre-Trial Order, government counsel submitted their proposed statistical charts and supporting source materials, counsel for the defendants counter-proposed the stipulation of a comprehensive body of basic data which might be drawn upon for the purposes of studies submitted by either side, and to this the government agreed. Accordingly, counsel for the defendants, assisted by a research staff under the direction of Dr. Bertrand Fox, Director of Research of the Graduate School of Business.Administration of Harvard University, prepared a number of basic compilations of comprehensive information on security issue financing. These compilations, which were reconciled with the government's figures through the cooperative contributions of work by government counsel, were either put in evidence as joint exhibits of plaintiff and defendants or stipulated to be competent proof from which either side might make appropriate submissions, as follows:

  (i) "Issue Registers." In view of the small volume of financing in the first year and one-half following the enactment of the Securities Act of 1933, the parties agreed upon the period January 1, 1935 to December 31, 1949 as an appropriate and convenient fifteen-year span for purposes of statistical analysis. Eleven compilations, called "Issue Registers," were prepared and received in evidence, which listed, by years and by categories as to size and character deemed appropriate for relevant analysis, 9,879 security issues publicly offered or privately placed in the United States during those fifteen years. These comprised new and secondary issues, underwritten and nonunderwritten, effected with or without the services of investment bankers, of domestic and foreign business corporations and foreign governments and revenue obligations of domestic governmental units. The security issues included were, generally, those of $100,000 and larger (although in some categories the issues listed were those of $1,000,000 and larger). For each of the 9,879 issues the "Issue Registers" set forth the date of the offering or placement, the name of the issuer, a fully identifying description of the issue as to kind of security, rate of interest or dividend, maturity, and the like, amount of the issue, the type of transaction and method of offering and the names of the investment banking firms who acted as managers or agents.

  There was thus presented a substantially complete survey of all security issue financing (other than of direct and general governmental and municipal obligations) in the United States in the post-Securities Act period.

  (ii) "Issue Data Sheets." For all underwritten issues of $1,000,000 or larger of business corporations and foreign governments listed in the "Issue Registers" (except issues of domestic railroad equipment trust certificates), there were prepared and received in evidence "Issue Data Sheets" which set forth further information in extensive detail, including data on spreads, management fees, underwriting expenses, selling concessions dealer sales, group sales, and the names and amounts and percentages of the underwriting participations of all of the underwriters of each issue.

  (iii) "Public Sealed Bidding Sheets." For all issues offered at public sealed bidding during the same fifteen-year period, in the categories covered by the "Issue Data Sheets," information identifying the heads of bidding accounts and bids submitted, and the participation of defendant firms in various bidding accounts, whether or not successful, was compiled and received in evidence in "Public Sealed Bidding Sheets."

  (iv) "Issuer Summaries." The defendants also prepared and submitted to the Court a two-volume compilation of security issues in the United States in the post-Securities Act period (July 26, 1933 to December 31, 1949). These volumes, filling in the gap between the passage of the Securities Act and the beginning date of the general statistical compilation and adding certain categories of issues not embraced within the "Issue Registers," organized basic information about all of the issues alphabetically by names of issuers, in order that the security issue financing history of any of some 4,000 issuers could be conveniently traced. This compilation was subsequently stipulated by government counsel to be complete and correct and was received in evidence as a joint exhibit of plaintiff and defendants.

  (v) "Pre-Securities Act Issuer Summary Sheets" were prepared with respect to all of the known security issue financings, going back for many years prior to July 26, 1933, of (a) each issuer for which any defendant firm acted as manager or agent of an issue in the post-Securities Act period, and (b) each issuer concerning whose financings the government had indicated by its answers to interrogatories that it would offer proof. The information here collected was in substantially the same categories covered by the "Issue Registers," but due to the absence of complete information in many cases the investment banking firms shown were those which could be ascertained to have acted as managers or agents or to have been in privity of contract with the issuer or to have been prominently identified with the offering of the issue in the offering circular. Since it could not be made statistically complete and comprehensive, this compilation was not offered in evidence as such, but was stipulated by the parties to be a competent pool of proof from which either side might make submissions. During the course of trial "Pre-Securities Act Issuer Summary Sheets" on the financings of 616 different issuers were put in evidence by the various parties.

  Numerous analytical studies dealing with the stipulated security issue data for the fifteen-year period 1935-1949 were prepared by the defendants, with the assistance of Dr. Bertrand Fox, and were submitted to the Court, including principally the following:

  (i) "Analysis of the Volume of Security Issues 1935-1949," a quantitative analysis, by charts and tables, of the data on the types of securities issued and the types of transactions used by various classes of issuers over the fifteen years.

  (ii) "Tables M 1 through M 16: Investment Bankers as Managers or Agents," analyzing the data as to the dollar amount and the number of issues for which each of 40 to 50 investment banking firms (including each defendant firm) acted as manager or agent during the fifteen years.In addition to revealing the relative activity and performance of each of those firms by triennial periods, as well as for the fifteen years as a whole, this study examined the data by class of issuer, by size of issue and by type of transaction.

  (iii) "Table P 1 and P 2: Investment Bankers as Underwriters," analyzing the data as to the dollar amount and the number of underwriting participations of each of 75 investment banking firms (including each defendant firm) in all underwritten new and registered secondary issues of $1,000,000 and larger, by triennials and for the fifteen years, separately for negotiated issues and for public sealed bidding issues.

  (iv) "Tables and Charts P 10 and P 11: Analysis of Alleged Reciprocity in Underwriting Participations," examining, on a number of alternative comparative bases, the alleged reciprocity in underwriting participations between each defendant in this action and each of 37 other investment banking firms (including each other defendant) both in dollar amount and number of underwriting participations and in terms of dollar volume of contemplated gross spread proportionate to participations, for negotiated issues and for negotiated issues and public sealed bidding issues combined.

  (v) "Tables PSB 1, 2 and 3: Summary Record of Public Sealed Bidding Issues," analyzing the relationships between type, size and rating of issues at public sealed bidding, size of accounts formed to bid, and the number of bidding accounts, and examining these relationships in terms of all bidding accounts and of bidding accounts headed by or participated in by defendants.

  (vi) "Record of Individual Firms as Head or Member of an Account in Public Sealed Bidding Issues, 1941-1949 (for each of the 17 defendant firms, for Mellon Securities Corp. and for Halsey Stuart)," analyzing the activity of the firms listed in accounts, both successful and unsuccessful, by types and grades of securities and by sizes of issues for each year.

  In addition to these principal studies of security issue financing and investment banking activity, many other charts and tables submitted on behalf of all of the defendants or submitted separately by some of the them were studied and considered. These included analyses of the trends over the years of spreads and spread components (underwriting compensation, selling concessions and management fees) in relation to size, type and investment quality of securities, examination of the composition of and changes in the business done by various of the defendants, and studies of other matters bearing on the competitive positions and activities of investment banking firms.

  Charts and tables submitted by plaintiff at various times during the presentation of the government's case dealt with, among other things, participations, "directorships," "historical position," management activities and management fees.

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