Implementation of the Securities Act of 1933 and the Securities and Exchange Act of 1934

1
Implementation of the Securities Act of 1933 and
the Securities and Exchange Act of 1934
2
Brief Overview

• 1929 Stock Market Crashes
• 1932-1933 Senate Banking Committee investigates
  reasons for the market crash
• 1933 Securities Act of 1933 is passed
• 1934 Securities and Exchange Act of 1934 is
  passed
• 1934 Securities and Exchange Commission is
  formed

3
The Crash of 1929

• Black Thursday October 24, 1929
• House of Morgan invests money in attempts to
  raise the prices of stocks
• Black Tuesday October 29, 1929
• This is the first time in the history of the New
  York Stock Exchange that private investors and
  corporations cannot fix the problems in the
  market

4
Senate Banking Committee Investigation

• Members want to know why the stock market crashed
  and punish anyone who acted illegally.
• Some of their theories
• Short selling stocks
• Selling worthless foreign bonds
• Earnings reported on annual reports and earnings
  reported to the IRS vary significantly
• Stocks being sold at different prices to
  different people
• Supply exceeding demand

5
Initiating the Investigation

• President Hoover avoided initiating the
  investigation as long as he could.
• In February, hearings began due to rumors of a
  plan to short sell stocks
• The Senate Banking Committee and Hoover both made
  it clear that no federal legislation was intended
  to be implemented

6
The Senate Banking Committees First Attempt

• Peter Norbeck, Chairman of the Senate Banking
  Committee, appoints Claude Branche as lead
  counsel
• Branche is timid and unprepared
• His first witness, Richard Whitney, President of
  the New York Stock Exchange, is his exact
  opposite
• Not really moving any farther than Whitney, the
  investigation ceased, and the Senate Considered
  discontinuing funding the investigation

7
The Pecora Hearings

• Roosevelt was anxious to have the hearings
  reconvene
• At the same time, Roosevelt was anxious to impose
  federal legislation in regards to the trading of
  securities
• Ferdinand Pecora was appointed lead counsel nine
  days after President Roosevelt took office.

8
Pecoras First Victim

• Insul a group of public utility companies that
  collapsed in 1931 after previously providing 10
  of the countrys electricity and many other
  services
• Pecoras findings
• All five major holding companies had minority
  control by a member of the Insul family
• Shares were sold to himself and his family at
  half price
• Shareholders were informed of a 10.3 million
  profit in 1930. The IRS was informed of a 6.5
  loss.
• Insul had loans from every major bank in
  Illinois. Many were cash advances that exceeded
  the state mandated limits

9
Pecoras Next Victim

• National City Bank the second largest
  commercial bank in the country. They gave
  excessive cash advances to Insul
• Pecoras findings
• The company had violated laws that prevented
  commercial banks from participating in
  nonbanking activities
• The company hired unqualified people at high
  commission rates to sell foreign bonds
• Shares were sold to president Charles E
  Mitchells wife to create a tax loss. This was a
  clear violation of tax laws.

10
Pecoras Final Victim

• House of Morgan a huge investment banking firm,
  which was broken up, but is still successful
  today
• This investigation was highly publicized.
• Pecoras findings
• He discovered that the House of Morgan hadnt
  paid taxes on tax years 1929-1932. The House of
  Morgan had legitimate reasons.
• House of Morgan stock was sold at a decreased
  price to prominent political figures, such as
  William McAdoo, a member of the Senate Banking
  Committee.

11
Conclusion to the Pecora Hearings

• The Securities Act of 1933 and the Securities and
  Exchange Act of 1934 were the direct responses to
  the Pecora Hearings of 1933
• When the Acts are examined, there is a response
  to each of the findings in the Pecora Hearings