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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 ...

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