Evening star., 1936-06-19
IDEALS" DECLARED
SAMPLE Of BOND
RACKET" ACTIVITY
SABBATH Committee Files
Supplemental Report in
House Today.
LEGISLATION SUGGESTED
TO AID BONDHOLDERS
Mayfower, Shoreham and La
Sale Cited in Declaration
Tactics Worst Here.
BY WILL P. KENNEDY.

BY WILL p. KENNEDY.
The reorganization of the Wardman
properties may be cited as a model
for all prevalent trickery in the real
estate bond racket" according to a
supplemental report to the House today
from the SABBATH Committee inveSti-
eating real estate bondholders' re-
organizations.
In this instance may be found
practically every abuse prevalent in
reorganizations." the report said. The
Wardman properties reorganization in
cluded the Wardman Park Hotel,
Davenport Terrace, Chastleton, Carl
ton, Highland Apartments. Cathedral
Mansions, Wardman Park Addition,
old Justice Department Building, 2700
Connecticut Avenue, Stoneleigh Court
and Boulevard Apartments.
This supplemental report also COW
cred the Mayflower Hotel, Shoreham
Hotel and the La Sale Apartments. 1t
found. in general, that conditions in
regard to real estate bondholders' re-
organizations in Washington are
similar to those in other cities, but
'predominating in Washington more
than elsewhere" is the practice Of APP
pointment of three trustees and three
receivers, in addition TO the creation
Of many bondholders' protective COM
mittees. and similar groups, for one
proceeding.
Why it Is necessary to have three
receivers on a property. and in some
instance to employ attorneys for the
receivers, although all three are at
torneys themselves, is beyond all rea.
son" the report said.
Legislation Suggested.
Legislation for Government super
vision of bondholders' committees and
others who handle liquidation Of de-
faulted real estate securities for the
bondholders was suggested by the COM
mittee.
Headed by Representative SABBATH,
Democrat, of Illinois, the group re-
ported that disclosures indicate
gross fraud and dishonesty, and ap-
parent income-tax evasion, warrants
ing the scrutiny of the Justice De-
partment and the Internal Rvenue
Bureau"
A bill by SABBATH has been approved
by the House Judiciary Committee.
II would make the controller OF the
, currency a "conservator" to act as a
friend of the bondholders in bank
/ ruptcy actions.
The committee found that creation
of voting trust on the rcorgE Enization
of a property is a common practics
throughout the country, and ex-
planned that in Washington these
voting trusts. usually comprised Of
former members of bondholders' pro-
tective committees. or their aSsoci-
ates, perpetuate themselves indefi-
nitely. Their fees and expenses con-
tinue and the properties never are
under direct control Of bondholders."
Bankers Action Scored.
One of the 'groSs irregularities"
found by the Investigators was dur.
ing the period when strenuous ef-
forts were being made to protect the
name Of and save the Wardman Corp.
from bankruptcy or receivership, so
!! long as the bankers had a large
amount Of its debentures and bonds
yet to sell This was the payment
Of interest to debenture holders SUBJ
stantially held by the bankers them
selves when they knew that default
was imminent"
TT1 orI kr tIna 10
ties, the report concluded that con-
troll by the bankers of the three Ward
man corporations, arbitrarily assumed,
has been disastrous to the public,
which invested millions of dollars, but
profitable to the bankers, who in
vested nothing. Under these circum-
stances. the bankers now are in posi-
ton to manipulate affairs of the first
mortgage bondholders. 1t is in their
power to regulate income on these
bonds and to depreSs their value SO
they can purchase them at very low
prices, ultimately freezing out original
investors. At present market value,
it is possible to buy all outstanding
bonds for approximately $500 900,
subject only to about $3,250,000 un-
derlying mortgages, which would vest
ownership in properties originally
valued at S28 1000 900.
The anomaly of those investing
$1I 100000 IN f1rst-mortgage bonds
being subjected to domination and
control of a group, largely bankers.
who invested only S2,500,000 in Sec
ond and third mortgages. is so dam
gerous and open to fraudulent manip-
ulation that it Is repugnant to public
policy"
Reviewing the financing of the
May1ower Hotel property, which orig
inally cost $2,250,O00. but upon which,
by an inflated appraisal of S11 900 900,
bonds to a total Of $9,900,000 we're
sold, the committee found that after
foreclosure proceedings had been
halted by a petition to the District
Supreme Court and execution of the
original plan of reorganization had
been prevented. "the trustees under
trust indenture failed to protect all
bondholders whether depositing or
non -depoSiting
The report pointed out that CON
troll still remains with original hou IS
of issue subject to possible miSm2n-
agement, waste and other acts detri-
mental to the interests of firSt-mort-
gage bondholders. Those bankers who
sold the original bonds upon fraudu-
lent and misleading representations
again emerge in position to acquire
this proper by depressing prices 81
bonds through deliberate mismanage-