Opinion ID: 1473033
Heading Depth: 1
Heading Rank: 4

Heading: The Huston Contract of 1924.

Text: The appointment of the Guy Huston Company as the fiscal agency of the bank was accomplished by the contract dated May 15, 1924, and adopted by the board of directors of the bank June 16, 1924. The contract recited that the bank proposed to issue and sell additional shares of its capital stock, and that the Guy Huston Company had theretofore sold stock and bonds for the bank in a manner satisfactory to the bank. The contract appointed the Guy Huston Company sole and exclusive representative of the bank for the sale of its stock which it proposed to issue, and for the sale of its bonds to be issued. Section 2 of the contract provided that the Guy Huston Company should use its best efforts to sell the stock at such prices as the parties deemed for the best interests of the bank. Section 3 provided that the bonds should be sold at such prices as the parties deemed advisable, but at a price which would net the bank not less than 101 (unless the parties agreed to a sale at a less price). Sections 4, 5, and 6 read as follows: 4. The said second party shall be entitled for its compensation for services rendered in negotiating the sale of stock, at the rate of two and one-half dollars ($2.50) per share for each share sold hereunder, but this shall apply only to stock issued in addition to the eighteen thousand (18,000) shares now outstanding, and stock cancelled and reissued shall not be considered as new stock; said compensation of two and one-half dollars ($2.50) per share on new stock shall be due and payable when stock is issued and has been paid for. 5. The said second party shall be entitled for its compensation for services rendered in negotiating the sale of bonds, at the rate of two and one-half dollars ($2.50) for each one thousand dollar bond sold by it hereunder. Bonds sold to refund outstanding bonds to be considered the same as new issued. The compensation for the sale of each bond to be paid at the time of sale. 6. The second party is hereby authorized to purchase any or all of said shares of stock or any or all of said bonds, or to sell the same to others, either in its own name or in the name of the said Bank, the said shares of stock to be purchased by the second party at a price as provided for in section 2, and the said bonds to be purchased by the second party at a price equal to the best price then obtainable therefor from others as aforesaid, provided that the second party shall be entitled to compensation as provided in sections 4 and 5. Section 10 provided in part as follows:    If the Guy Huston Company shall fail to secure the sale of the stocks and bonds of the Bank as herein provided within ninety (90) days after being requested so to do by the Bank, at the end of such ninety (90) days the Bank shall be free to employ the services of others to perform such services with respect to such sale without any accountability to the Guy Huston Company for the compensation [hereinafter] in paragraphs 4 and 5 hereof mentioned with respect to the bonds and stock so sold. Section 12 provided in part as follows: 12. The Guy Huston Company    shall have the right to make field inspections    and if the second party shall find that excessive or improper loans are being carried, steps shall be immediately taken to correct such conditions, even to the extent of discharging such person or persons responsible therefor. Section 13 provided that the contract should remain in force for 20 years from May 15, 1924, unless previously terminated by mutual consent. There is nothing on the face of the contract which indicates fraud, or any intention on the part of the parties thereto to defraud. On the contrary, the provisions of sections 12 and 13 tend to negative the idea that the contract was part of a scheme to defraud. It was generally agreed by parties interested in the bank that a fiscal agency was necessary. The experience of the bank since the termination of the former Huston contract tended to prove such necessity. R. A. Cooper, who was Farm Loan Commissioner at that time, testified as follows: I think a fiscal agent for a bank of this character is very necessary, if it is going to do business in considerable volume. In the first place, you need some one who is familiar with the technique, you might say, of investment banking, to distribute your securities to the best advantage. Then, with any bank that issues bonds in considerable volume, you find a great many purchasers who desire to change their investments, and your securities will come back into what they call the secondary market. Unless you have some one to repurchase those bonds and redistribute them to bona fide investors, you will have a very unsatisfactory market in the making of new offers. If you do not have some one to take care of that secondary market, the bank will be offering a new issue when its older issues are being offered to new purchasers; the effect will be to depress the market in those particular securities below the actual intrinsic value those securities should have. This is true of both bonds and stocks, for the same reasons. This matter of protecting the secondary market is essential both for joint stock land banks and federal land banks. W. A. Streater of Mankato, Minn., one of the directors of the Southern Minnesota Bank at the time, and who had been placed on the board at the instance of the Northern Trust Company of Chicago, and who made reports to that company from time to time, testified as follows: I was a director of the Land Bank at the time the 1924 contract was made with Mr. Huston, and was in favor of it, for the reason that in my opinion it would give the bank an outlet for its securities, and by so doing would furnish the bank with loanable funds. William H. Gold, one of the defendants, wrote to Mr. Landes, member of the Farm Loan Board, November 26, 1924, as follows: This Bank undertook to handle its own stock and bonds direct with bond houses, who apparently were not giving us adequate protection and not furnishing a substantial secondary market. Arrangements were then made with the Guy Huston Company of New York. $25,000 was placed in his hands with the understanding that he at all times would furnish us with a list of Joint Stock Land Banks bonds, either our own or on other Joint Stock Land Banks carried with these funds, and they stand ready at all times to do this. The advantages accruing to our Bank by virtue of the contract with the Guy Huston Company are already very apparent. The market for our bonds is stiffening every day and when the Bank gets ready to dispose of its bonds we are confident that it will gain at least 1% over and above what could have been secured direct from the bond houses. The small commission received by Guy Huston Company will be exceeded many times by the premiums accruing to the Bank in the sale of both its stocks and bonds in the future. Actual experience has demonstrated this.