Evening star., 1939-06-04


investment trust, newest plaything of
high financial adventure, is described
with dramatic detail in a report now
under consideration by Congress, which
was submitted by Judge Robert E. Healy,
acting chairman of the Securities and
Exchange Commission, pursuant to Sec
ton 80 of the Public Utility Holding
Company Act of 1885,
The present study deals primarily with
abuses peculiar to management invest
ment companies, and postpones to a
later date treatment of the useful func-
tlons which such organizations, when
honestly and competently conducted, may
be able to perform for industry and the
capital markets. Many of the problems
company industry, it is stated, had their
origin in the years l920-29, when the
great majority of investment companies
in operation today were organized, their
structures largely determined, and many
of their managers placed in power.
During that period" the report main
tains, there were engendered the va
and patterns of improper practices
which have prevailed and still persist
in many investment companies today,
and which constitute a continuing threat
to the safety and preservation of a large
part of the public funds invested in these
organizations.
Imported From England.
The history of that period, even when
reduced to bare statistics, forms an
amazing financial melodrama. The in
vestment trust, imported from England
in 1920, was based on a sound principle
namely, that large number of small
investors, by pooling their resources
may obtain a diversity of portfolio, and
a consequent abatement of risk. which
are unavailable to single individual
The idea spread slowly. BY the end of
1925, there had been formed only 600
investment companies, with total assets
not exceeding s700 0O0,O1o and less than
100000 security holders.
The young industry was sent sky
rocketing by the stock market boom of
1869, operating with the violence of
a charge of dynamite. The number of
investment companies grew to 1900,
their stockholders to 100000 and their
assets to peak of more than $4,000 OOO,-
600. Yearly sales of security issues
bounded sharply within two years from
less than $400 100000 to more than So
000,0OO000 During 1929 alone 265 new
companies were created virtually at a
rate of one for each business day.
The youth of the industry divested it
of two essential safeguards. Govern
ment regulation was absent. No pro-
fessional class of experts in broad-range
investment, with its own system of
ethics, had developed. The field was
therefore open to amateur promoters,
such as lawyers. professors, economists
and accountants. 1t was open also to
financial desperadoes. The S.. E. Cs
record narrates tale after tale of men
penniless or even in debt who within a
few months, by pyramiding company on
company, ran up their strings from
zero or less to millions of dollars.
Crash Brings Limbo.
Nemesis was swift to strike. In Octo-
ber, 1929, the stock market collapsed
Forthwith half of the investment COM
panies in existence vanished into limbo,
by the routes of bankruptcy or absorp-
tion. Their assets toppled from $8,O0O-
100000 to less than $2,000,00O, 900. When
accounts were finally settled the stock
holders had lost upwards of $3,00O,-
100000, ranging from 80 to "A per cent
of their total cash purchases of securities.
An analysis of ownership Of common
stock in group of large investment COM
panies reveals that more than half of
the shareholders had invested $500 or
less. and that nearly 10 per cent held
stock worth $1,000 or less.
The depression, it is admitted, was an
influential factor in this disaster But
figures collected by the S. E. C's
statisticians tend to show that in numer-
Gus cases malpractices of management
bore even larger responsibility.
In the instance of the Iroquois Share
Corp. of Buffalo, N. Y, it is estimated
that shareholders lost 60 per cent of the
money invested in "interlocking" Sc
curities and only Is per cent of that in
vested in unrelated" stocks.
4 tendency among management in
siders to place their OWL interests before
those Of security holders was noted in
many cases. A favorite device was to
gain control of small company, often
by means of borrowed money, to use it's
assets as stepping stone towards con-
troll of larger one, and to kick the first
company aside into bankruptcy when its
purpose was served. Too frequently, it is
alleged, investment companies were en-
ployed as dumping grounds for securities
otherwise unmarketable, or as sources of
loans to officers and directors with in
adequate or worthless collateral At
first Wall Street looked without favor
on the investment trust, terming it a
blind pool" and declaring that the pur-
chase of $1,000 of stock was equivalent
to handing that sum over to a stranger
with permission to gamble with 1t as he