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Mr. SOBELOFF. Oh, yes, I understand this, and this will be under oath as a part of my testimony. I will be very glad to avail myself of the opportunity to read this letter. It is very brief, considering the complexity of the matters discussed and it does not go into too much detail. I wrote Senator O'Mahoney as follows:
DEAR SENATOR O’MAHONEY: Permit me to comment on the principal features of the letter addressed to you by Mr. Charles Shankroff, which appears in the Congressional Record of May 17th.
Boiled down, Mr. Shankroff's letter levels three basic charges against me:
1. That in the sale of the Baltimore Trust Building I was counsel both for the receiver, as seller, and for the buyer. I was neither.
2. That I settled suits against the directors for an inadequate amount,
3. That I represented inconsistent interests in the settlement of the stockholders' liability. These charges are utterly without foundation.
I. The receiver himself sold the building and not to any client of mine. The facts are, and the record shows, that I represented neither the seller nor the buyer in that transaction. The seller was the receiver but Mr. Shankroff persistently ignores the limited nature of my legal employment under the court's order, namely, that I had nothing to do with the liquidation of the assets of the receivership. My employment was limited to making an investigation of the causes of the failure of the Baltimore Trust Co., and later in suing the directors. I was appointed by the judge as an independent officer of the court. Mr. John Hospelhorn, the receiver, had other counsel in the administration of the estate. He confirmed on May 5 that I had no part in the sale of the building and was not consulted by him in respect thereto. This was a matter beyond my scope. I was not even aware of the sale when it was made.
Nor did I represent the party that purchased the building from the receiver. In 1943-nearly 7 years after I had completed my assignment and had been discharged by the court
I may interpolate here, after the final distribution to the creditors in this proceeding—
a subsequent purchaser of the building (Raymond J. Funkhouser), whom I did not know at the time of his purchase, retained me, at the suggestion of his regular counsel, Mr. James Ingram of Hagerstown, to have the receiver remove his filing cabinets which were occupying valuable office space in the building. That was the only occasion on which I had any business with or for Mr. Funkhouser. This was after the receiver had made final distribution to the creditors. I did not even know him when he bought the building and certainly did not know when the receiver made the original sale to someone else. From Mr. Hospelhorn's testimony I understand that the sale to Mr. Funkhouser was the third transfer after the receiver's sale of the building. Senator O'MAHONEY. May I interrupt?
Mr. SOBELOFF. Yes, sir.
Senator O'MAHONEY. I note that you inserted the word
Mr. SOBELOFF. "him". I would like to put that into the original, because it is omitted there. I elsewhere deny knowing of the sale, it is true in both-I did not know of the sale at the time it was made and I did not know him.
Senator O'MAHONEY. I want to know how you want this sentence to read. As it appears in this letter-let me read it to you, it says: I did not even know him when he bought the building and certainly did not know when the receiver made the original sale to someone else.
Mr. SOBELOFF. That is right.
Senator O'MAHONEY. That is the way you want it to stand? Mr. SOBELOFF. I want the other-that sentence to stand as it is. Senator O'MAHONEY. Yes.
Mr. SOBELOFF. This adds the information that-the first sentence says that I did not know Funkhouser when the building was sold
to someone else. This says, the first sentence, I did not know him when he bought the building, this sentence says that I did not know him when the original sale was made
Senator O'MAHONEY. Well, it is all one sentence connected by the word "and," two clauses.
Mr. SOBELOFF. I did not even know him when he bought the building and I certainly did not know of him when the receiver made the original sale to someone else.
Senator O'MAHONEY. That is the way you wish it to stand?
Mr. SOBELOFF. That is right. Elsewhere I state that I did not know of the sale when it was made, I did not have anything to do with it.
In these circumstances, Mr. Shankroff criticises my professional conduct. Mr. Hospelhorn, the receiver, who was summoned to appear before the subcommittee to support the charges, completely refuted them. He verified that he, as receiver, sold the building and that I had nothing to do with it. II. The directors' suit: Who settled and what was settled?
The second charge is that I settled claims against the directors for an insufficient amount. Mr. Shankroff says in one part of his letter that the claim amounted to $20 million; elsewhere he fixes the amount at $56 million. Neither figure is correct.
In my report I found that the directors had been guilty of neglect of duty and recommended suits. When one of three counsel for the received declined to participate, I was appointed in his stead.
I might interpolate that I was appointed in his stead for that case only, not for the general administration.
Because of technical uncertainties as to jurisdiction duplicate suits were filed at law and in equity. In the main suit, to which Mr. Shankroff refers, the bill of complaint recited some 40 transactions in which losses had occurred. It was not claimed that the directors were liable for the total loss. In the prayer for relief the court was asked to order an accounting to determine what part of the loss was attributable to negligence in any particular transaction and upon which transactions individual directors were to be held liable. No specified amount was claimed.
Mr. Shankroff's figures are arrived at by aggregating the various losses recited and on which no specific amount of liability was claimed. And he lumps together the duplicate suits to inflate the alleged total. Also he apparently adds up alternative counts where the same claim is alleged under different legal theories. Such a total is meaningless as a. basis for judging the adequacy of the settlement price.
The record further shows a specific notation in the judge's order that I did not recommend the settlement.
I might here refer to Mr. Hospelhorn's affidavit because he quotes what the judge said at the time. The judge said that he was not making the settlement on the advice of counsel and that he knew that some of them were, at least, not satisfied, and I later protested it. Reasons for the settlement
There were, however, strong practical reasons making the settlement advisable-difficulties of proof due to death, unavailability of witnesses, reluctance of others to testify, et cetera. The wisdom of the settlement satisfied the court at that time. Despite the wide scope of interests affected, which were represented by some of the leading lawyers at the bar, no exceptions were filed to the settlement. Mr. Shankroff's accusation is based upon his interpretation and speculation 20 years after the event.
The repeated assertion that the directors were charged with criminal liability is not true
Repeatedly the Shankroff letter says that my report found criminal and civil negligence. This is not true. My report expressly absolved the defendants of fraud, bad faith and all criminal liability. I refer to the report itself, volume
II, page 522 ff. See also photostat of published summary in Baltimore Sun, June 7, 1936.
I would appreciate to have that made part of this record. Senator O'MAHONEY. May I hand you this document and ask if that is the document to which you refer?
Mr. SOBELOFF. I am not sure that this is the one. Have you any others? Have you copies of that, Senator?
Senator WATKINS. Yes; I think I have.
Mr. SOBELOFF. The headline reads, "Sobeloff's Final Report on Affairs of Old Baltimore Trust Summarized-Officer of Court Find Reckless Management-Recommends Suit Against Directors, but Asserts There Is no Ground for Criminal Action."
I would like to make all three pages part of the record.
Senator O'MAHONEY. The exhibits you are offering are, No. 1, page 8 of the Sun, Baltimore, Sunday morning, June 7, 1936, headed across the entire page, "Sobeloff's Final Report on Affairs of Old Baltimore Trust Summarized," and this may be made a part of the record.
The second one is a continuation, page 9, of this report. The heading here, again across the full page is, "Maldistribution of Investments by Management of Defunct Bank Discussed."
The third one is page 4 of the Sun, Baltimore, Saturday morning, January 25, 1936, column 1, of which is headed, "Baltimore Trust Report Is Filed," and the rest of the page is given over to Sobeloff's summary of his preliminary Baltimore Trust report.
These three documents are hereby filed for the record. (The documents referred to are as follows:)
BALTIMORE TRUST REPORT FILED BY SOBELOFF-OPERATIONS OF BANK UP TO SEPTEMBER 1931 TRACED IN DOCUMENT-PRELIMINARY WORK LAUDED BY O'DUNNE— INVESTIGATOR TO RESUME SURVEY ON RETURN FROM VACATION
Operations of the Baltimore Trust Co. up to September 1931 were traced in a 500-page report filed yesterday in circuit court No. 2 by Simon E. Sobeloff, former United States district attorney, who has been investigating the bank's affairs for the past 3 months.
Although he had been instructed by Judge Eugene O'Dunne to determine whether any liability, civil or criminal, was attached to any of the bank's officers, Mr. Sobeloff drew no conclusions, reserving "any recommendations as may seem appropriate" for a final report, which is expected to be ready in 2 or 3 months.
TO REVIEW CONDUCT OF BANK
This report, on which Mr. Sobeloff will start work as soon as he returns from a vacation he began yesterday, will also review the conduct of the institution's affairs from September 1931 until it closed at the beginning of the bank holiday in February 1933.
Filed with the preliminary report was a "supplement," in which Mr. Sobeloff discussed "important subject matters" of conferences with bank officials and enlarged on certain phases of his report. Also filed was a 5,000-word summary of the two.
Judge O'Dunne in addition wrote the clerk of the court a letter, filed with other documents, in which he said: "There is neither the time nor the place for this court in anywise to comment on the contents of said report and rights are reserved to all parties in interest to reply thereto in such manner and form as they see fit, subject to the control and direction of said court."
The judge commended Mr. Sobeloff for "the arduous work he has done, the heroic efforts of time and talent expended, which is simply staggering in character, and the court marvels that any human being, in the time allotted to him for this work, could have produced such and intelligent and comprehensive result."
Mr. Sobeloff was appointed by Judge O'Dunne to conduct the inquiry on September 11, during hearings before the judge on the statutory liability of the institution's stockholders.
He was ordered to complete his work by December 31, but shortly before that time he told the court it had been impossible. Judge O'Dunne then requested him to file at least a partial report on that date and to remain at the task until it was completed.
DATA BEING STUDIED
Mr. Sobeloff completed the preliminary report, containing nearly 150,000 words, and placed it and scores of exhibits in the judge's hands on that date. Since then Judge O'Dunne, bank officials, and attorneys for the bank's receiver have been studying it.
Mr. Sobeloff wrote that he had attempted, as he had been directed, to be thorough and impartial, and said that while he indicated some tentative conclusions, he preferred to reserve his ultimate conclusions as to the possible liability of the directors until he had completed his task.
A month after Judge O'Dunne first appointed Mr. Sobeloff he widened the scope of the inquiry and told the investigators to look into "the whole subject matter of so gigantic a failure and the loss of nearly $20 million of depositors' money in the shrinkage of securities."
The judge later ruled that the stockholders must pay the double liability, but a few weeks ago allowed them to settle the claim against them for half price-$5 for each share of stock they held. More than $1,300,000 was paid by stockholders taking advantage of the offer and the jurist has directed that those who have not paid it shall be sued.
From the amount paid in, it was revealed this week, depositors and other creditors will receive another 5 percent payment in a few months, bringing the total amount they have received to 36.6 percent of what the bank owed them.
Discussing the part Howard Bruce played in the bank's affairs, Mr. Sobeloff's report said: "Justice to Mr. Howard Bruce requires us to bear in mind that nearly all the losses hereinafter considered occurred in respect to loans and investments made before he entered the Baltimore Trust Co. as an officer. administration will be fully reviewed in the final report."
PRODUCT OF AMBITION
He said the bank "as finally constituted was the product of the ambition of Baltimore bankers to build a large financial institution through several mergers,' and he added that "the policy of spreading branch banks over the city was a gross folly and reminds one of the race for gasoline filling station sites."
He dated the beginning of the retrenchment efforts as June 1, 1931, when James Bruce became president, and "in a short time reduced overhead at the rate of about $500,000 a year, but by the summer of 1931 confidence in the Baltimore Trust Co. had been seriously impaired."
On September 20, the report went on, $7,755,000 was subscribed as a guaranty fund 2 days after the clearing house made an ineffectual effort to bolster confidence in the Baltimore Trust Co. by publishing a reassuring advertisement.
SECURED NO PREFERENCE
The bank's directors, he said, "did not avail themselves of their presumed inside knowledge of the bank's affairs to secure for themselves and their companies preference over other companies by heavy withdrawals."
The bank's losses totaled $29,003,051.03, Mr. Sobeloff revealed, adding "the losses resulted from operations extending over a number of years. Forty million dollars is the cost of the residue of the assets, and their actual and realizable value is $11 million.
He also listed a number of other loan losses of the bank, which ranged as high as $600,000.
"The final report will consider the law applicable to the facts disclosed by the completed investigation, together with such recommendations as may seem appropriate," Mr. Sobeloff concluded.
DEPOSITORS OF TRUST COMPANY TO GET FUNDS-SUBSTANTIAL DIVIDENDS EXPECTED TO BE PAID BEFORE JULY 1, 1938-SOBELOFF FILES HIS FINAL REPORT-RECOMMENDS CIVIL SUITS AGAINST DIRECTORS OF DEFUNCT BANK
Substantial dividends will be paid to creditors of the old Baltimore Trust Co. before July 1, 1938, the end of the liquidation period, according to the final report of Simon E. Sobeloff on affairs of the closed bank. The report was filed yesterday in the circuit court.
Depositors already have been paid 35.875 percent of their claims. Regarding future payments, Mr. Sobeloff said:
"It is impossible to predict their amount with any degree of certainty."
Mr. Sobeloff was appointed special court officer by Judge Eugene O'Dunne, with orders to investigate and report on conditions leading to collapse of the bank. The final report, dealing largely with affairs from 1931 to the close in 1933, follows a preliminary report filed with the court in January.
CIVIL SUITS RECOMMENDED
Civil suits against directors of the bank held responsible for the losses were recommended by Mr. Sobeloff, who pointed out, however, that no criminal liability attaches to the bank officials. Of this he said:
"Although investigation shows abundantly that the directors were guilty of gross neglect of duty and they tolerated an inexcusably reckless administration of the bank, it is a distinct satisfatcion to be able to record that here has been a total absence here of the corruption and evil intent which has unfortunately been responsible for some large bank failures in other cities.
"Actionable negligence there has been, but I wish to state clearly, and I trust it will be as clearly understood, that any suits that may be instituted are predicated upon negligence and not upon dishonorable conduct."
ORDERS REPORTS EXAMINED
Coincident with the filing of the report, Judge O'Dunne issued a court order requiring John D. Hospelhorn, receiver, and his counsel to examine the final and preliminary reports and determine whether they are in accord with M. Sobeloff's findings of fact and of law. If not, they are to report their disagre ment to the court together with reasons for it.
Said Judge O'Dunne:
"This court's reasons for such definite action must be readily apparent: To embark on a program of prompt and vigorous litigation, against various and sundry directors, involves large and important litigation, requiring skilled talent and substantial legal expense.
"It should not be undertaken unless the facts reasonably warrant. If warranted by the facts surrounding this gigantic failure, the prosecution of such suits should not be under the legal control and direction of counsel not in sympathy with the prosecution of such suits or who do not believe in the truth of the facts presented in the Sobeloff report or by counsel whose legal conclusions as to liability of said directors are not in accordance with the Simon Sobeloff conclusions of law."
COUNSEL GIVEN COPIES
Counsel for the receiver are Joseph C. France, Alexander Armstrong, and J. Purdon Wright. They were given copies of the 659-page final report 10 days before it was filed and were advised by Judge O'Dunne to confer with Mr. Sobeloff regarding possible changes before filing.
Failure of the bank directors to supervise actions of the executive officers even in the face of repeated danger signals was traced by Mr. Sobeloff all the way through the multifarious activities of the bank.
Investments in highly speculative activities, many of them far afield from Baltimore, and many made without adequate investigation were held responsible by Mr. Sobeloff for the loss of millions of dollars. These included the financing of a scheme for importing yearling horses from England and Ireland, training them in Maryland and selling them as 2-year-olds at the Saratoga (N. Y.) auctions.