United States v. Morgan

TOPICAL ARRANGEMENT OF OPINION

Introduction.

The Offense as Charged in the Complaint.

Certain Alleged Unifying Elements Abandoned or Disproved.

The Applicable Law Relative to Conspiracy.

Part I:

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.

Part II:

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.

*626 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

Part III:

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.

Part IV:

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?

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.

Miscellanea.

Dillon Read.

National Cash Register.

Amerada Petroleum.

Outlet Company.

Beneficial Industrial Loan.

Union Oil.

Commercial Investment Trust.

Rheem.

Blyth.

Rayonier.

Pan American Airways.

Anaconda Copper.

Iron Fireman.

Some Further Interim Observations.

Part V:

The “Triple Concept”.

Semantics.

“Historical Position”.

Chicago Union Station.

The Alleged “Practice” of “Traditional Banker” and “Successor-ships”.

1. Morgan Stanley.

The “Master Mind”.

The Telephone Business.

Consumers Power.

*627 ,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.

S. 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 Oil.

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.

Pillsbury.

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.

Part VI:

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.

*628 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-50 and Further Amendments to Rule U-12F-2.

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

Part VII:

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

Part VIII:

Conclusion.

Administrative Features and Statistics of the Trial

Summary, Rulings on Motions and Dismissal.

Appendix:

Summary Description of Statistical Compilations, Tables and Charts.

Introduction

This is a civil action in equity to restrain the continuance of certain alleged violations of Sections 1 and 2 of the Sherman Act, Act of Congress of July 2, 1890, c. 647, 26 Stat. 209, 15 U.S.C. §§ 1, 2, 4. It is charged that defendants entered into a combination, conspiracy and agreement to restrain and monopolize the securities business of the United States and that such business was thereby unreasonably restrained and in part monopolized.

The “securities business” which is the subject of these charges is defined in the complaint in terms that are uncertain and in part contradictory. In the ■clarifying process of pretrial hearings and trial, however, counsel for plaintiff receded in part from the allegations of the complaint. As finally re-defined, plaintiff’s position is that the “security issues” to which the charges of the complaint should be understood to relate are intended to include new issues, and secondary offerings registered with the Securities and Exchange Commission under the Securities Act of 1933, 15 U.S. C.A. § 77a et seq., of securities of domestic and foreign business corporations and foreign governmental units and foreign municipalities, offered to or placed with investors in the United States, but to exclude domestic railroad equipment trust certificates, all notes and serial notes representing term loans by commercial banks, all general and revenue obligations of domestic governmental units and domestic municipalities, and all unregistered secondary offerings of any securities.

The combination, conspiracy and agreement to restrain and to monopolize and the actual restraint effected thereby are claimed to have embraced every method and type of transaction by which issues of the above-defined securities have been transferred from the issuers (or from sellers of blocks of such securities in registered secondary offerings) to the hands of investors, whether underwritten by investment bankers or non-underwritten, whether privately placed or publicly offered to existing security-holders or the general public, and whether in negotiated transactions or at public sealed bidding, with the exception, however, of direct offerings by issuers to their security-holders in which investment bankers are not employed as agents or underwriters. The part of the securities business which is charged to have been monopolized by the defendants in the course of and through the operation of the conspiracy is claimed to have consisted of all new issues of the above-defined securities, and all registered secondary offerings thereof, which have been underwritten by investment bankers in negotiated transactions and publicly offered to existing security-holders or to the general public.

*629 The Offense as Charged in the Complaint

The complaint charges an integrated, over-all conspiracy and combination formed “in or about 1915” and in continuous operation thereafter, by which the defendants as a group “developed a system” to eliminate competition and monopolize “the cream of the business” of investment banking. The prolixity of the complaint and its various involutions are such that it will be convenient to summarize and paraphrase its contents, as was done in the trial brief submitted at the opening of the trial by counsel for the government. The mortar to cement together the various parts of this extraordinary document is provided by a series of definitions, many of which bear little resemblance to the meaning of the various words or phrases used in the business.

The central theme is what has been referred to throughout the case as “the triple concept” of “traditional banker,” “historical position” and “reciprocity.” To quote from the brief above referred to:

“Under the traditional banker concept that banker who first manages an underwriting for a particular issuer is deemed entitled to manage in the future all additional security issues offered by such issuer. * * * Under the concept of historical position once a banker participates as a member of a buying group in the purchase of the securities of a particular issuer, such banker is deemed entitled to participate on substantially the same terms as a member of the buying group in all future issues offered by such issuer. Under the concept of reciprocity the defendant banking firms recognize a mutual obligation to exchange participations with one another in the buying groups which they respectively manage.”

In this connection the complaint specifically charges that:

“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.”

And that:

“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.”

As it is evident that no such parcel-ling out of the investment banking business could function so long as the management of issuers was free to choose and deal with any investment banking house it wished, there is alleged in the complaint as one of the terms agreed upon by the defendants, and as part of the conspiracy and combination, that there should be a species of control over issuers so as to “preserve and enhance their control over the business of merchandising securities:”

“(1) by securing control over the financial and business affairs of issuers, by giving free financial advice to issuers, by infiltrating the boards of directors of issuers, by selecting officers of issuers who were friendly to them, by utilizing their influence with commercial banks with whom issuers do business.”

One of the terms of the agreement said to have been made by the members of the combination and conspiracy is that when a “representative” of one of the 17 defendant banking houses becomes a director of an issuer, this is understood by all the rest to be the equivalent of “raising a red flag,” and thus warning the others to keep off.

As a measure of combined control over issuers and the several hundred other investment banking houses *630 against whom the conspiracy was to operate, it is charged in the complaint that in 1915 “the modern syndicate method of distributing securities was invented by defendant banking firms and their predecessors,” and that defendants agreed that with certain modifications this method should be utilized by defendants to stabilize the business “by fixing and controlling the prices, terms, and conditions of purchase, sale and resale of securities.” This “device” is said to be manipulated by defendants in various ways, all as part of the general plan or scheme. For example, it is alleged that defendants as managers of such syndicates not only further the ends of the combination or conspiracy by dealings among themselves, but that they sometimes exclude other firms from participations or selling group positions, and sometimes include such firms “which might otherwise attempt to compete with defendant banking firms;” and that by means of this “device” defendants “agree among themselves upon a uniform, non-competitive price” which, having thus been “fixed” by them, is foisted upon issuers, by what can only euphemistically be called “negotiation,” in view of the domination and control exercised or attempted to be exercised over the issuers by defendants. It is worthy of note that the allegations with reference to the syndicate system and its so-called price-fixing features are made solely in reference to the charge of the integrated, over-all combination and conspiracy.

Certain statutory and regulatory provisions of great significance, which became effective in 1934, 1941 and 1944 are reflected in other phases of the combination and conspiracy as charged.

In 1933 the Congress passed the Glass-Steagall Act, 1 pursuant to the terms of which commercial banks and their security affiliates were required to go out of the investment banking business, if the banks desired to continue taking deposits and performing their other banking functions. The deadline was June 16, 1934. The affiliates were accordingly dissolved; and such banking houses as had bond departments or otherwise engaged directly in the investment banking business, with very few exceptions, elected to continue their banking functions and restricted their operations in the field of securities to governmental and other issues specifically exempted from the operation of the new law. Thousands of employees of these institutions were forced to make new connections, and many joined the staffs of some of the 17 defendant investment banking houses.

It is the theory of the complaint that the pre-existing and flourishing combination and conspiracy met this situation by a further agreement among the conspirators to the effect that certain of the defendant firms should succeed to or “inherit” the conspiratorial “rights” theretofore parcelled out to the commercial banks and their affiliates by the operation of “the triple concept” above described, and that the combination or conspiracy should accordingly, and it is alleged did, continue to operate as before. This is the predecessor-successor phase of the case in a nutshell. The complaint originally read as though certain firms became and were the real successors of others in a legal sense whereas what was intended to be pleaded, as disclosed by an amendment of the complaint made in the course of pre-trial conferences, is that the “successors” were such only in the sense that the alleged conspirators so agreed as part of the operation of their integrated, overall combination and conspiracy.

In 1941 the Securities and Exchange Commission promulgated a rule requiring securities of companies, affected by the provisions of the Public Utility Holding Company Act of 1935, 15 U.S. C.A. § 79, et seq., to be sold by compulsory public sealed bidding, and similar action, relative to debt securities of railroads, was adopted by the Interstate *631 Commerce Commission in 1944. In this connection and in very comprehensive terms the complaint charges that these 17 defendants as part of the same integrated, over-all combination and conspiracy agreed to discredit the use of competitive bidding, private placements and agency sales as methods of disposing of security issues. The competitive bidding phase of the charge is divided roughly into three parts: (1) Opposition to campaigns which resulted in the adoption of the rules above referred to. (2) Refusal to submit sealed competitive bids and the adoption of a great variety of “devices” for the purpose of sabotaging the new rules and hence defeating the purposes of the two governmental agencies which had made public sealed bidding compulsory with respect to a not inconsiderable area of security issues. Such “devices” were alleged to have included: the organization of -overly-large syndicates, the grant of participations equal to those of the manager, the reduction of management fees and the merger of accounts. (3) After -certain insurance companies had bid in a large issue of securities of the American Telephone & Telegraph Company in the fall of 1941, it is charged that a certain agreement was made on December 5, 1941 and “approved” on May 5, 1942, by virtue of which the insurance companies were to be eliminated as direct ’bidders for security issues.

According to the complaint the means adopted by the conspirators to accomplish their ends were many and various. 'They seem to include, under the heading -of “customs and practices,” said to have been agreed upon to effectuate the design of the conspirators, many of the alleged abuses which over the years have •been charged against investment banking houses in general, but which have not as yet been affected by specific legislation.

This in brief is the framework and the essence of the charge against these 17 defendant investment banking firms. Much of the detail is omitted for the moment in the interest of clarity. Many of the charges against defendants were from time to time abandoned and removed from the case and no further reference will be made to them.

Thus “the substantial terms” of the “continuing agreement and concert of action” originally alleged against the group of 17 in paragraph 44 of the complaint included: (1) an agreement to cement their relationships with issuers by securing clearances from such issuers before making their investment banking facilities available to competing business enterprises and by refusing to act as advisers or underwriters for small business concerns; (2) an agreement to utilize their domination and control to encourage and promote consolidations, mergers, expansions, refinancings and debt refundings to increase their investment banking business; and (3) an agreement to concentrate the business of purchasing and distributing security issues in a single market. These were all withdrawn by counsel for the government.

The following “customs and practices,” alleged in paragraph 45 to have been “formulated and adopted” by agreement of the group of 17 were originally included but later dropped: (1) the formation of “standby accounts” for all security issues of a particular issuer to prevent the assembling of competing groups and thus discourage issuers from disposing of issues at competitive bidding; (2) in the event of insolvency or reorganization of issuers with whom a “traditional banker” relationship existed with a member of the group, to cause a partner, officer or other nominee to be appointed to influence protective committees for the benefit of such “traditional bankers”; and (3) subsequent to the divorcements required by the Investment Companies Act of 1940, 15 U. S.C.A. § 80a-l et seq., continuing to influence managing investment companies or trusts in which capital had been “strategically invested” so that voting powers would be exercised “in the interests of defendant banking firms.”

*632 Such other issues as were removed from the case by consent need not be specified, except as they may be hereinafter referred to.

The complaint bears every evidence of careful and prolonged preparation, its articulation is close and compact, every word is carefully chosen and fitted exactly in its proper place. Thus it is the 17 defendant banking houses, arrayed against the balance of the investment banking industry, and alleged to be acting in combination to monopolize “the cream of the business,” and divide it up among themselves, by excluding those investment banking houses which are not part of the conspiracy. If the charge is true the restraints are ingeniously devised to create a controlled rather than a free market at every level. The operation of “the triple concept” prevents competition as between defendants themselves; the domination and control over issuers and the “fixing” of the price to be paid issuers for their security issues deprives issuers of a free market in which to raise the money they need; non-defendant firms are deprived of an opportunity to compete for the business; the trading operations of dealers and brokers are restricted during the period of the continuance of syndicates formed for the distribution of new security issues; and investors are deprived of an opportunity to purchase securities in a free market.

And all this is said to have gone on for almost forty years, in the midst of a plethora of congressional investigations, through two wars of great magnitude, and under the very noses of the Securities and Exchange Commission and the Interstate Commerce Commission, without leaving any direct documentary or testimonial proof of the formation or continuance of the combination and conspiracy. The government case depends entirely upon circumstantial evidence.

Certain Alleged Unifying Elements Abandoned or Disproved

During the prolonged and extensive pre-trial conferences, there was much discussion of the method to be pursued by the government in attempting to prove that these 17 defendant investment banking houses had formed a combination and were acting jointly as a group. As pointed out in my memorandum of April 9, 1951, filed with Pretrial Order No. 3, United States v. Morgan, D.C., 11 F.R.D. 445, 454-455, the unifying elements of the alleged conspiracy were obscure, as no industry-wide uniformity was charged, there was no powerful group such as the “Big Three” operating against independents in the American Tobacco Co. 1 case, no letter or series of agreements presenting a definite plan to which others might consciously adhere as in the Interstate Circuit 2 and Masonite Corp. 3 cases and there appeared to be many non-defendant investment banking firms which were larger, had more capital and did more business than some of the defendants herein. Certain aspects of the present case, however, which have since been abandoned or disproved seemed to have relevance to this important phase of the case.

The first of these was the fact that it was claimed that defendants and their “predecessors” had invented the syndicate system to further their plan or scheme. This charge, which was evidently the basis for the allegation that the conspiracy was formed “in or about 1915,” has been conclusively disproved and has been virtually abandoned.

The second such possible unifying element was the Investment Bankers Association, originally joined and for many months of the trial continued as a defendant and alleged co-conspirator. Each of the defendant firms was and *633 had for many years been a member of this Association, particularly during the period when the Association, through its officers and committees took a strong position against the adoption of rules and regulations requiring compulsory publie sealed bidding for certain types of new security issues. On motion of the government, however, the Investment Bankers Association was, with my approval, eliminated as a defendant and the charge that it was a co-conspirator was withdrawn. The name of its president Emmett F. Connely, was, however, continued in the list of alleged co-conspirators, evidently because he had made a speech on October 7, 1941 criticizing the purchase of the American Telephone & Telegraph bonds by a group of certain large insurance companies at public sealed bidding and one or two men connected with some of the defendant firms had in one form or another expressed their approval of the speech.

Perhaps the most impressive indication of joint action by the defendants lies in the detailed and explicit allegation of the complaint relative to reciprocity. Not only is it charged that 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 received from them; but also that over a period of time the profits from such participations are substantially equivalent, with due allowance for differentials in prestige and underwriting strength. If substantiated, these allegations would indicate some systematic and continuous arrangement between the defendants to pay one another off in return for the alleged agreement to defer to one another as “traditional bankers.”

Here again, however, there was not merely a failure of proof but an affirmative demonstration that the allegations are without foundation in fact.

No evidence of any kind, whether by way of alleged reciprocity records, deposition proof or documents, was produced on this phase of the case against Dillon Read, Drexel, Glore Forgan, Morgan Stanley, Smith Barney, Union Securities and White Weld; nor were any alleged reciprocity records introduced against Harriman Ripley and Kuhn Loeb. Such records as were received in evidence were of the most disparate character. They covered different periods of time, included non-defendant firms as well as defendant firms, and were so fragmentary and different in character one from the other as to make it clear that they had not been prepared as the result of any joint action whatever. No calculations of reciprocal obligations, such as would have been required by the operation of the conspiracy as alleged, could possibly have been made from these miscellaneous and incomplete loose leaf books and cards.

A careful scrutiny of the documents received in evidence on this part of the case, taken in connection with the so-called reciprocity records and such testimony as was taken by deposition, indicate that a few individual defendant firms, motivated by various considerations of a purely business character, and acting separately and not in combination, did no more than is often found done by business men generally. In the course of a business relationship it is a natural and normal thing for those in the same industry occasionally to seek business on the basis of business given. Were there some uniformity or some common pattern the case would be different. As it is, there is a pattern of no pattern; and I find that, considering all the evidence in the record, including the stipulated statistical data, the reciprocity charge has been disproved.

The Applicable Law Relative to Conspiracy

The Sherman Act is not an open door through which any court or judge may pass at will in order to shape or mould the affairs of business men according to his own individual notions of sound economic policy. Nor was it ever intended by the Congress that judges should determine such policy questions as: the desirability of compulsory *634 sealed bidding for new security issues; the propriety of officers or partners of investment banking firms accepting directorships on the boards of issuers; the good or bad effects of the solicitation of proxies by investment bankers; and whether investment bankers should be permitted to advise issuers concerning their financial affairs, the formulation of long range plans for expansion and refunding, the setting up of specific security issues and kindred subjects and also perform services and assume risks in connection with the registration and distribution of such security issues. The regulation of such matters is a legislative function and the series of statutes which have become law since the great depression of 1929 and the following years bear ample testimony to the fact that the Congress is mindful of its power to regulate such matters, by reason of their connection with interstate commerce.

What the Sherman Act does is to declare illegal “every contract, combination * * * or conspiracy” in restraint of trade or commerce and to make guilty of a misdemeanor “every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce” among the states or with foreign nations. The task of the judge is to determine whether the conduct challenged in the litigation contravenes the prohibitions of the statute. This is no mandate to the judiciary to decide anti-trust cases according to individual ideas of expediency, which may change according to the personal philosophy or even the political affiliation of the judge. It is the combination or joint action of the many which is the essence of the offense. Unless there is some agreement, combination or conspiracy the Sherman Act is not applicable.

But it is supposed by some that the requirement of combination is a mere empty phrase to which one must indeed do lipservice, but which may easily be got around by finding agreement, combination or conspiracy when in truth and in fact no agreement, combination or conspiracy exists, provided the result obtained seems desirable and in the public interest. This is not the law but only another aspect of the false but seductive doctrine that the end justifies the means which, so far as I know, has never taken lodgment in American jurisprudence; and I hope it never will.

True it is that conspiracies whether by business men or others engaged in unlawful schemes are often hard to detect. No direct proof of agreement between the wrongdoers is necessary; circumstantial evidence of the illegal combination is here as elsewhere often most convincing and satisfactory. But, when all is said and done, it is the true and ultimate fact which must prevail. Either there is some agreement, combination or conspiracy or there is not. The answer must not be found in some crystal ball or vaguely sensed by some process of intuition, based upon a chance phrase used here or there, but in the evidence adduced in the record of the case which must be carefully sifted, weighed and considered in its every aspect. This is an arduous but necessary task.

Especially is this true in a case such as the present one where the great bulk of the documentary evidence is initially received against a particular defendant and only subject to connection against the others in the event that the combination or conspiracy is proved. According to well established precedents such documents may be used circumstantially against all; but this works both ways as the probative force of such proof, when considered circumstantially may not tend to support the factual conclusion that the combination or conspiracy existed but rather the contrary. In any event it is well settled that statements contained in such documents, received subject to such connection, may not be used to establish the truth of their contents, except as against the particular defendant against whom such documents are received generally. And it is well that this is so for much that *635 is contained in casual memoranda and even in messages, reports, teletypes and diary entries is mere rumor and gossip, which frequently turns out to be unreliable hearsay. Once the conspiracy is established, however, all such statements become those of agents of the group, to be considered against all the defendants as part of the proofs in the case generally.

PART I

The Investment Banking Business

It would be difficult to exaggerate the importance of investment banking to the national economy. The vast industrial growth of the past fifty years has covered the United States with a network of manufacturing, processing, sales and distributing plants, the smooth functioning of which is vital to our welfare as a nation. They vary from huge corporate structures such as the great steel and automobile companies, railroads and airlines, producers of commodities and merchandise of all kinds, oil companies and public utilities, down to comparatively small manufacturing plants and stores. The variety and usefulness of these myriad enterprises defy description. They are the result of American ingenuity and the will to work unceasingly and to improve our standard of living. But adequate financing for their needs is the life blood without which many if not most of these parts of the great machine of busines would cease to function in a healthy, normal fashion.

The initial inquiry in any anti-trust case must be into the character and background of the industry involved. In a case such as this, which covers so long a period of time and a multiplicity of issues and which is largely documentary in character, it is not too much to say that it is impossible to pass upon questions of credibility of witnesses and to understand and interpret the thousands of miscellaneous exhibits, including memoranda, letters, diary entries, teletype inter-office messages and so on without some fairly adequate understanding of the way in which the business is and has been conducted. Thus we turn to the evolution and growth of the investment banking business and the way it functions in the modem American scheme of financial affairs.

By way of prefatory comment and to facilitate orientation, it may be helpful first to describe some of the major factors. The central thought, as in every anti-trust ease, must be the character and scope of competitive effort or the lack of competitive effort.

The principal factors which one must constantly bear in mind are: (1) the evolution of the syndicate system from its inception prior to the turn of the century, and its function in the issuance and distribution of securities; (2) the impact on the investment banking business of economic forces and a series of acts of Congress including the Banking Act of 1933, the Securities Act of 1933, the Securities Exchange Act of 1934 and the Public Utility Holding Company Act of 1935, and the various amendments to these statutes, supplemented by rulings and regulations of the Securities and Exchange Commission and the Interstate Commerce Commission; and (3) the complete and comprehensive static and statistical data which show the details of every relevant security issue in the period from January 1, 1935, to December 31, 1949.

While the complaint alleges that the syndicate system was invented at or about the time of the Anglo-French Loan in 1915 by the defendants and their “predecessors,” it has been conclusively established, as already stated, that the syndicate system as a means of issuing and distributing security issues was in use at least as early as the 1890’s; and in this early period price maintenance was to some extent used, as it was appreciated even in those days that the problem of placing upon the market a large bulk of new securities required careful management and planning lest the very quantity involved should depress the price and make distribution within a reasonable time difficult if not impossible.

*636 The present method for issuing and distributing new security issues thus has its roots in the latter part of the nineteenth century. It is the product of a gradual evolution to meet specific economic problems created by demands for capital, which arose as the result of the increasing industrialization of the country and the growth of a widely dispersed investor class. It was born in large part because of, and gradually adapted itself to, conditions and needs which are peculiar to the business of raising capital.

I. Prior to the First World War

Prior to the year 1900, the large majority of industrial and business units which existed in this country were small in size and their capital needs were small; use of the corporate form was not widespread. There was no substantial and widely scattered class of persons with surplus savings who sought promising investment opportunities. A large part of the capital needed came from abroad. Securities sales operations were conducted principally by selling agents who sold on a commission basis, and more often than not it was the issuer who bore the risk of how successfully and how quickly the required funds would be obtained.

The evolution of the investment banking industry in the United States is illustrated by the early phases of the development of two of the defendant investment banking firms, Goldman, Sachs & Co. and Lehman Brothers.

Goldman, Sachs & Co. traces its origin back to the year 1869, when Marcus Goldman started a small business buying and selling commercial paper. In the year 1882, he was joined in that business by Samuel Sachs, and at that time the firm, which had been known as Marcus Goldman, became M. Goldman & Sachs. In the year 1885, when additional partners joined the firm, the firm became Goldman, Sachs & Co., and has continued as such from then on to today. At that time, it was very difficult for small manufacturers and merchants to get capital with which to operate, so Goldman, Sachs & Co. developed the business of buying their short-term promissory notes, thus furnishing them with needed capital, and selling these notes to banks or other investors. This commercial paper business prospered and continued to expand in the 1880’s and 1890’s, and, by the time of the year 1906, when the opportunity first arose for Goldman, Sachs & Co. to underwrite some financing for United Cigar Manufacturers, now known as the General Cigar Company, the firm had established many contacts all over the country with merchants and manufacturers. During this period, also, partners of Goldman, Sachs & Co. took frequent trips to Europe, because at that time it was difficult to raise capital for American enterprises in the financial markets of this country, and they entered into arrangements with European bankers, whereby they would lend money in this country for their account.

Likewise, the firm of Lehman Brothers traces its ancestry back to about 1850. Since then, a series of partnerships, formed from time to time upon the withdrawal or death of partners or the addition of new ones, has conducted business under the name of Lehman Brothers. The firm had prospered greatly as “cotton bankers,” and, years before the turn of the century, it had established its headquarters in New York City.

In the late 1890’s and the early 1900’s, the prime securities were railroad bonds and real estate mortgages. The public utilities business had not as yet achieved great importance, and, consequently, public utility securities were generally looked upon with disfavor. Railroad and public utility financing was handled by a small number of firms. The railroad financing was done to a considerable extent by Kuhn, Loeb & Co., J. P. Morgan & Co., Vermilye & Co. and August Belmont; and a large percentage of the capital was furnished by French and German underwriters. The public utility financing was done to a large extent by Harris, Forbes & Co., which had become a specialist in the securities of companies providing power and light. Harris, *637 Forbes & Co. was becoming known as an underwriter which understood and knew how to solve the problems of those companies, and had the knack of raising capital for the growing industry. There was an open field in certain light industrial and retail store financing which had been neglected or overlooked.

After the beginning of this century, as family corporations grew larger and needed more capital for expansion, or when the head of a family died and money was needed to pay inheritance taxes, it became increasingly apparent that commercial paper, which was short-term money, was insufficient to meet the capital requirements of those small enterprises. At about this time, Goldman, Sachs & Co., desirous of entering the business of underwriting securities, conceived the idea of inducing privately owned business enterprises to incorporate and to launch public offerings of securities. In the early 1900’s it was considered undignified to peddle retail store securities, but Goldman, Sachs & Co. believed that, with the growth in size of family corporations and other privately owned business enterprises, there would be a market on a national basis for their security issues. The problems involved in offering securities to the public, where no securities were previously outstanding in the hands of the public, were new and difficult of solution, and different from the problems involved in the underwriting of bonds of a well known railroad. The sale of retail or department store securities required a different market.

When the opportunity arose in the year 1906 for Goldman, Sachs & Co. to underwrite the financing of United Cigar Manufacturers, it was unable to undertake the entire commitment alone, and could not get the additional funds which it needed to underwrite from commercial banks or other underwriters, as they would not at that time underwrite this type of securities. Henry Goldman prevailed upon his friend Philip Lehman of Lehman Brothers to divert some of his capital from the commodity business and to take a share in the underwriting. The result was that the two firms, Goldman, Sachs & Co. and Lehman Brothers, became partners in the underwriting of the financing of United Cigar Manufacturers. When the opportunity arose in that same year for Goldman, Sachs & Co. to underwrite the financing of Sears, Roebuck & Co., it was perfectly natural for it again to turn to Lehman Brothers for assistance, and the two firms became partners in that enterprise. Thus it was through this oral arrangement between two friends, Henry Goldman and Philip Lehman, through this informal partnership, that Goldman, Sachs & Co. was able to obtain the capital which it needed to underwrite these two security issues in the year 1906. Without such capital, it would have been unable to enter the business of underwriting securities. The events which occurred in the year 1906 set the pattern for subsequent financings which Goldman, Sachs & Co. underwrote prior to the First World War. In the period from the year 1906 to the year 1917, although Goldman, Sachs & Co. occasionally underwrote financings with other partners, notably Kleinwort Sons & Co., merchant bankers of London, its principal partner was Lehman Brothers.

These two firms, as partners or joint adventurers, continued to act together thereafter underwriting securities of clothing manufacturers, cigar manufacturers, department stores and merchants, and the kind of businesses that most investment bankers, who were interested only in the securities of heavy industrials, railroads and to some extent public utilities, would not touch. The two firms began to cultivate acquaintances and build up relationships with securities dealers in other parts of the country who could market in their respective cities or towns th