exhibit b - affidavit and answers in the injunction suit ... · affidavit and answer of john...

Exhibit B.

AFFIDAVIT AND ANSWER OF JOHN SKELTON WILLIAMS, COMP-TROLLER OF THE CURRENCY, IN THE INJUNCTION SUIT OFTHE RIGGS NATIONAL BANK.

In the Supreme Court of the District of Columbia.

Equity, No. 33360.

THE RIGGS NATIONAL BANK, OF WASHINGTON, D. C, V. JOHN SKELTON WILLIAMS,COMPTROLLER OF THE CURRENCY; WILLIAM GIBBS MCADOO, SECRETARY OF THETREASURY; JOHN BURKE, TREASURER OF THE UNITED STATES.

Affidavit of John Skelton Williams, Comptroller of the Currency, by way of return to therule to show cause why the temporary restraining order issued should not be continuedand an injunction issue as prayed for in the rule.

DISTRICT OF COLUMBIA, SS:

JOHN SKELTON WILLIAMS, being sworn, says: I was Assistant Sec-retary of the Treasury from Maroh 24, 1913, until February 3, 1914.when I became Comptroller of the Currency, and as such Comptrol-ler am one of the defendants in the above-entitled cause.

An application has been made and is pending separately on behalfof each defendant to dismiss the action for want of jurisdiction toreview my acts. I am advised and respectfully insist that the exer-cise of my judgment and discretion as Comptroller is not reviewableby this honorable court. In view, however, of the character of thecharges contained in the bill of complaint and of my official position,1 take this opportunity to meet and answer in detail the allegationscontained in said bill.

I deny that I have conspired with the defendant McAdoo, Secre-tary of the Treasury, in any manner whatever to injure or destroythe plaintiff bank, or that I have or had any such intention, or thatany of my acts as Assistant Secretary or as Comptroller was causedby malice, hatred, or ill will toward plaintiff or its officers or any ofthem.

On the contrary, I aver that each and every of my acts complainedof was done by me in the honest performance of my duties in saidoffices, and in the best exercise of my judgment and discretion.

ACQUAINTANCE WITH PLAINTIFF AND ITS OFFICERS.

Before coming to Washington in 1913 I had had no dealings withthe plaintiff bank or with any of its officers. I had many yearsbefore casually met the president of the plaintiff—Charles C.Glover—but had never met any of its other officers. I had neverheard of its vice president, William J. Flather, nor of its cashier,Henry H. Flather, nor was I acquainted with its vice president,Milton E. Ailes.

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Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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After coming to Washington, both Glover and said Ailes madefriendly calls upon me in my office as Assistant Secretary. I had atthat time no occasion to entertain any feelings other than of afriendly character toward them.

DUTIES OF THE COMPTROLLER.

As Comptroller of the Currency I am the chief of the bureau ofthe Treasury Department charged with the execution of all laws ofCongress relating to the issue and regulation of the national currencysecured by United States bonds. The Comptroller is charged withthe duty, among others, of examining into all the affairs of nationalbanks for the purpose of ascertaining the condition of the bankswhich necessarily involves the character of their management, todetermine whether or not such banks are and have been operated inconformity with the laws and to enable him to recommend amend-ments to existing laws. Such examinations are to be made by bankexaminers appointed for that purpose by examination of the recordsand papers of the bank as well as by pral examination of its officersand by means of reports from the bank itself made pursuant togeneral or special calls from the Comptroller.

General reports are made by each bank pursuant to calls from theComptroller, which the law requires at least five times a year. Specialreports may be called for from a particular bank whenever in thejudgment of the Comptroller additional information is necessary, andcalls for special reports are not of infrequent occurrence. The bankexaminer usually examines each national bank at least twice a year,or as much of tener as the condition of the bank or the circumstancesof the case in the opinion of the Comptroller may require.

CALLS FOR SPECIAL REPORTS FROM PLAINTIFF.

Tn the summer of 1913, in connection with the deposit of Govern-ment funds with banks throughout the country to aid in movingthe crops, and again in the spring of 1914L in preparing data for theSecretary in connection with the so-called] " tax deposit" of Govern-ment funds with the national banks of tlfie District of Columbia, IHad occasion to look into the condition of the respective nationalbanks in the city of Washington and tljie class of business whichthey were doing, and therefore became familiar to some extent withtheir operations. The regular semiannual examination of the plain-tiff was made in May, 1914, by the bank examiner. In these ways Ilearned that about three-fourths of plaintiff's total loans were uponstocks and securities, and that it had been charged with conductinga stock brokerage and real estate loan business throughout the greaterpart of its existence. During the said examination in May the exam-


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iner reported that certain of the bank's officers had stated and insistedto him that the brokerages and commissions earned in such businesseswere earned and appropriated personally by officers of the bank. Hereported also that the bank was carrying large loans with stocks assecurity, in many instances the borrowers not being depositors withthe bank.

I deemed it necessary, in order to ascertain the condition of thebank and whether such condition was reflected by the books of thebank, to know whether it was engaged in a stock brokerage and realestate loan business, whether commissions were being charged by thebank and credited to profit and loss, or were being charged by itsofficers and appropriated to their personal use while the bank wasbeing used to carry these stocks for persons who had no depositaccounts and whose relations with the bank were confined to dealingsin stocks and bonds through it.

Thereupon, on June 9, 1914, I called for a special report fromplaintiff bank which would throw the desired light upon the condi-tion of the bank in this respect. Thereafter, as matters developed,further special reports were called for and examinations were madeby the bank examiners for the like purpose.

RESUME OF FACTS SHOWN BY INVESTIGATION.

From the investigations made by* me, from the special reportsmade pursuant to the aforesaid calls, from the letters of criticismwritten by my predecessors in office to plaintiff bank and the repliesthereto, from the reports of the bank examiners of their examina-tions of said bank, and from oral examinations of its chief executiveofficers, it appears that from the time of its organization, or there-abouts, until after the calls for special reports by me plaintiff bankhas steadily, persistently, and notwithstanding repeated admoni-tions and instructions from preceding Comptrollers of the Currency,engaged in business beyond the powers of a national bank; that whenobjection was made to certain of its practices plaintiff bank adopteddevices as hereinafter specified, by means of which the same unlaw-ful businesses were carried on and the bank continued to profittherefrom.

From these same sources I learned that throughout its existencethe plaintiff bank has engaged in the business of lending its moneyon real estate security and in lending on commission the money ofothers on such security, and has continuously conducted a large andextensive stock-brokerage business and has bought and sold stocksand other securities, both for itself and on commission for others;that immediately after its organization these businesses were carriedon directly in the name of the bank; then they were Dartly conducted


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in the name of the firm of Glover, Hyde, Johnston, and others, com-posed of five of the six stockholders of the bank, who at that timetogether owned three-fifths of its capital stock; that later the entirebusiness was carried on in the name of the bank, and, finally, in thenames of certain officers of the bank; but, except during the existenceof the firm mentioned, all profits from these businesses, with theexceptions hereinafter stated, went to the bank itself, and the plan ofdoing business in the names of the officers was a mere device con-ceived in an attempt to evade the law. In conducting these unlawfulbusinesses the officers of the plaintiff bank in using its funds to lendupon real estate required subordinate employees to give their per-sonal notes to the bank to represent funds so used, said officers fur-nishing collateral security, but failing themselves to sign the notes.

In many other ways the plaintiff bank and its officers violated thelaw. From its organization until 1906 the plaintiff bank continuouslyand against the constant protest of successive Comptrollers made andmaintained and carried large loans in excess of the lawful amount—in 1903 having fifteen such loans aggregating over $3,000,000. Therewas no time during this entire period when the law was not beingviolated in this respect. Sometimes the excess loans showed uponthe bank's books, and in other instances they were concealed bydummy notes of clerks of the bank. The extent to which its officershave been borrowing from plaintiff bank under the cover of dum-mies is not available to the department owing to their refusal tomake the reports on account of which the penalties of $5,000 havebeen assessed against the bank, the collection of which is sought tobe enjoined in this action. The bank for years engaged in the pur-chase of stocks on its own account—purchases which were ultravires—and here again it used the dummy note of an employee, tofalsely have it appear that it had disposed of such stocks when infact it had not done so after having been directed so to do by the thenComptroller. On at least three occasions, and it is believed on manymore, officers of the bank have borrowed its money upon notes signedby irresponsible dummies, the collateral to secure such loans beingfurnished by the borrowing officer and the identity of the actualborrower not being made known to the other directors.

Until the passage of the Federal reserve act the law required anational bank to maintain a reserve equal to 25 per cent of its de-posits, one-half of which must be in lawful money in its vaults.Practically continuously from January, 1910, to January, 1914, theregular reports of condition filed by the plaintiff bank show ashortage in its reserve ranging from $70,000 to $430,000, and anexamination of the bank showed that in practically each instancethere was an average shortage in reserve for thirty days prior to therendition of each report.


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During the time he held office one of plaintiff's directors wasdisqualified by reason of the fact that all his stock in the plaintiffbank was hypothecated for a loan, notwithstanding which, on threeseparate occasions, he made oath falsely stating that the stock wasunpledged.

Because of the unlawful businesses engaged in and the steps takento conceal the same, the bank's books have not shown the true condi-tion of its affairs, and many of the reports of condition madethroughout its existence have contained false items.

In addition to many actual violations of the law, in numerousways the business of the bank has been conducted irregularly andnot with a view to best serving the banking needs of the community.Its officers and directors have borrowed heavily—in May, 1913, atone time as much as $761,631.43, or approximately one-fourth of itsentire capital stock and surplus; large loans have been made toclerks upon the security of stocks, some of which were hazardousand speculative, and its officers have engaged in speculation in thestock market; the bank in the purchase of stocks for others has fre-quently carried stocks until the purchasers were ready to settle, andcarried such stocks as the equivalent of so much cash, this itemamounting at one time to as much as $73,000; up to 1908 the bankfrequently loaned to officials of the Treasury Department having todo with the supervision of its affairs; the bulk of the bank's loans—sometimes more than 90 per cent—have been made on the securityof bonds and stocks; and it has loaned a far smaller proportion ofits deposits upon commercial paper or for the needs of the businesscommunity than any other national bank in Washington, D. C.

The president of the plaintiff bank Charles C. Glover has heldthat office throughout its existence. Its vice president Milton E.Ailes has been such since April 16, 1903; for several years priorthereto—during which time plaintiff bank constantly violated thelaw—he was Assistant Secretary of the Treasury. Its vice presidentWilliam J. Flather and its cashier Henry H. Flather have been offi-cers or employees of plaintiff during its entire existence. Theseofficers throughout the life of the bank in large part have directed itspolicy and controlled its management, and are still in control of itsaffairs. They have caused it to violate the law and exceed its powers.Some of the violations have already been briefly summarized, butbefore answering the specific averments of the bill of complaintthe violations of law, as well as several practices of doubtful pro-priety, will be set forth under ten heads. In referring to transac-tions affecting individuals not connected with the bank out of con-sideration for such persons I have omitted their names and havedesignated them by letters of the alphabet but am prepared to fur-nish such, names to the court.


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1. STOCK BROKERAGE AND REAL ESTATE LOAN BUSINESS.

It is ultra vires and unlawful for a national bank to buy and sellstocks on commission or for others or to negotiate loans on realestate on commission. It has been so held by the courts.

July 1, 1896, the plaintiff bank succeeded a private banking firmknown as Biggs and Company, which to a large extent had carried onboth said businesses.

From its organization as a national bank till the practices werestopped, after my investigations, the plaintiff bank conducted a largeand extensive stock brokerage business, and engaged in lending itsown moneys upon real estate security, and in negotiating for otherson commission loans on such security.

In both businesses the funds of the bank have been extensivelyused. From its organization to the present time an average of about80% of the total loans of the plaintiff bank have been madeupon stocks and bonds, many of which were purchased for the ownersby the plaintiff bank, and many of which were speculative and ofuncertain value. A table made up from plaintiff's reports is attachedto the return of the defendant McAdoo as Exhibit F, showing thepercentage of plaintiff's loans of this character. Such percentagesrange from 60.51 to 91.61. In some of its reports plaintiff has stateduntruthfully the facts with respect to its loans upon real estate. Ihave had compiled from the examiners' reports on the plaintiff a list(hereto attached as Exhibit A) showing, as well as the examinerscould ascertain, the amounts of real estate loans unlawfully held byplaintiff bank at the times of such examinations.

Until January, 1897, both businesses were conducted directly by thebank and all commissions were credited to it on its books. In Jan-uary, 1897, five of the six stockholders, together owning three-fifthsof the stock of the bank, organized the firm of Glover, Hyde, Johnstonand others, and under that name carried on the real estate loan busi-ness until 1902, mainly with the capital and assets of the bank, whichtook and paid for the real estate mortgages at times out of its assetsand at other times for its customers or for others, the said firmdividing among its partners all the commissions and other profitsarising from said transactions.

During this period the stock brokerage business was conducted bythe bank as before, and the commissions were credited to the bankon its books.

In May, 1902, the firm of Glover, Hyde, Johnston, and others wasdissolved; thereafter and until November 30, 1906, both the stockbrokerage and real estate loan businesses were conducted by and inthe name of the bank, and all commissions and profits were creditedto the bank on its books. Purchases and sales of stocks were made on


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the exchanges in the name of the bank, and statements of accountsto the customers and others were made in its name, and it publiclyadvertised itself as engaged in the business of buying and sellingstocks and bonds for customers.

On three separate occasions in 1903 and 1904 the bank was ad-monished by the Comptroller in letters of criticism that its stockbrokerage business was ultra vires and should be discontinued. Butthe plaintiff bank ignored these warnings and instructions and per-sistently continued to engage in said business until after the makingof the special reports called for by this defendant in June, 1914.

In 1906 a new bank examiner learned the manner in which theplaintiff was conducting the said stock brokerage business, andthe bank was again informed that the same was ultra vires and couldnot be continued.

Notwithstanding the fact that the said stock-brokerage businesshad been carried on in the name of the bank, its officers insisted tosaid examiner that they had conducted said business as individuals,and the examiner stated that if that were so the business should showupon the books as being carried on in their names. Thereupon, withthe knowledge and approval of said examiner and it is claimed of thethen Comptroller of the Currency, the bank adopted the followingmethod of conducting said business:

The president of the bank, Charles C. Glover, and its vice presi-dent, William J. Flather, both of whom held seats on the Washing-ton Stock Exchange, were to carry on the stock-brokerage business intheir own names and were from time to time to give to the bank theprofits therefrom.

Accordingly, on November 30,1906, the plaintiff bonk opened uponits books an account called Charles C. Glover and William J. Flather(hereafter referred to as Glover & Flather). The said account wasclosed on April 17, "1914, by transferring its balance to the account ofFlather & Flather, hereinafter described. From the opening of theGlover & Flather account commissions on transactions on the Wash-ington Stock Exchange were credited to it, and from June 5, 1910,commissions on transactions on other stock exchanges were creditedto the same account.

An account known as W. J. and H. H. Flather (hereinafter calledFlather & Flather) was opened January 8,1907, and still stands uponthe books of the plaintiff bank. From its opening all commissionsand other profits from real estate loans made by any officer of thebank were credited to this account, and after April 17, 1914, uponthe closing of the Glover & Flather account, all items theretoforecredited to that account were credited to Flather & Flather.

In May, 1914, Examiner Trimble made his first examination ofthe plaintiff bank. He reported to me that he had inquired of the


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officers of the bank about the said accounts Glover & Flather andFlather & Flather, and was told by the said W. J. Flather thatall profits arising from transactions on the Washington Stock Ex-change by Messrs. Glover and W. J. Flather belonged to and wereretained by them, the bank having no connection therewith; andthat he was told by both said W. J. Flather and H. H. Flather thatthey as individuals made loans upon real estate in the District ofColumbia, disposing of said loans to customers of the bank; that thetotal volume of such business was about $500,000 per annum; thatthe profits and commissions arising therefrom were about $5,000 peryear, which sum was retained by the said Messrs. Flather and Flatherand equally divided between them, and that in corroboration of thisstatement the said W. J. Flather expressed a willingness to exhibithis income-tax return to said examiner. At that time the accountshowed a balance of a few hundred dollars in favor of Flather &Flather. Mr. Trimble's affidavit is filed herewith.

Accordingly, on June 9, 1914,1 called for a special report from theplaintiff bank showing what commissions had been received by it orits officers on transactions of the kind above described. In a letter datedJune 16, 1914, the president of the bank stated that no officer thereofhad profited personally by any commission received on or in connec-tion with any transaction for or on account of the bank; and in aletter dated June 18, 1914, the president stated, under oath, that noofficer of the bank ever claimed or intended to claim any part of thecommissions covered into the accounts Glover & Flather and Flather& Flather, and that no one of said officers had ever retained any partthereof or profited personally thereby.

The two statements last mentioned were in direct conflict with thestatements made by the said W. J. Flather and H. H. Flather to thebank examiner in May, 1914.

Thereafter the officers of the bank have repeated the assertion ofits president that no one of them has ever profited or intended toprofit by any of the commissions covered into said accounts Glover &Flather and Flather & Flather; but I have been unable, eitherthrough special reports or through an oral examination of theplaintiff's officers conducted by bank examiners, to obtain from theman unequivocal statement as to the ownership of the money andproperty standing to the credit of the said Flather & Flather account.

Notwithstanding the continued refusal of the plaintiff bank andits officers to answer the simple question as to the ownership of saidfund and upon all the information accessible to me, I aver that thecommissions, moneys, and property covered into the said account ofFlather & Flather and the balance now to the credit of Flather &Flather rightfully belong, and always have belonged, to the plaintiff


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bank, and that the said commissions, moneys, and property shouldhave been carried upon the books of the bank in its own name.

The moneys and credit of the bank have been largely used in earn-ing the commissions going into said accounts, and in many waysthey have been treated as belonging to the bank.

When an application for a loan upon real estate would be made tothe bank, if it did not at the time have funds of a customer for sucha loan available for that purpose, its officers would make the loan,either out of the funds standing to the credit of Glover & Flather orFlather & Flather, or out of other funds of the bank. In the lattercase the officers of the bank would direct a subordinate clerk to signa note for the amount used and that note would be put through thebooks of the bank as an ordinary discount, the officer of the bankdepositing with it as collateral security stocks or bonds of his own.When such loans on real estate were disposed of the amount wouldbe returned to the bank and the note given by the clerk cancelled.The money of the bank would thus be used over and over again inmaking these loans.

In conducting the stock brokerage business, after stocks had beenbought out of the bank's funds, it frequently happened that suchstocks were carried on the books and returned in its reports to theComptroller as so much cash items, instead of the amounts expendedtherein being entered upon its books as loans to its customers, orcharged against their accounts. As illustrative of this practice, thethen Acting Comptroller, by letter of November 11, 1913, calledplaintiff's attention to such items, aggregating $55,572.86, carried atthe time of the examination of the bank last preceding.

The officers of the bank claimed to have purchased for oneA , who was not a depositor with the bank, certain shares ofRock Island preferred and common stock, paying therefor $26,987.50.The bank carried this stock on its books as a cash item from January31, 1914, until March 3, 1914, though the said stock had greatly de-preciated in value, and on said last-mentioned date was worth notexceeding $11,500. Ultimately, as a result of this transaction, onDecember 31, 1914, the sum of $17,254.50 was charged off as a lossto the Flather & Flather account.

The credits of said accounts were treated from time to time as thefunds of the plaintiff bank. Said accounts were used to charge offworthless loans made by the bank, and as a means of charging offamounts paid in settlement of suits against the bank, and of maki/igcontributions for various purposes.

In February, 1908, the plaintiff bank credited to the account ofGlover & Flather the sum of $56,918.54, a profit made by the bank


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through the purchase and sale of United States bonds in a transac-tion handled on its behalf by its vice president, Ailes. This sum wasnot earned by President Glover or either of the said Flathers, norby Mr. Ailes, but was the property of the plaintiff bank.

As showing the position taken by the plaintiff bank, its officers anddirectors, before my calls for special reports as to whether the bankwas conducting a stock-brokerage business or its officers, as in-dividuals, were engaged therein, the plaintiff bank, by letter datedNovember 19, 1913, signed by the four principal officers of plaintiffand all its directors'except three, in replying to the Acting Comp-troller's criticism of its practice of carrying items of stock in thecash, said:

With respect to the statement of the examiner that it is the prac-tice of the bank to carry items of stock purchased for customers inthe cash, such items amounting to $55,572.86 at the time of his visit,you are advised that for the most part our purchases for customersare immediately charged against their accounts. It sometimes hap-pens'that an order can not be fully executed at once, and we havemet with some small delays in completing orders as well as in charg-ing purchases to accounts. The item above mentioned was largelycaused by the absence of one of our important customers in Jamaicaat the time his order was executed. In the future we will endeavorto avoid carrying these items in cash by making prompt chargesagainst customers' accounts. [Italics ours.]

2. EXCESS LOANS.

Prior to June 22, 1906, the law provided that the total liabilitiesto any national bank of any person, firm, or corporation for moneyborrowed should not exceed one-tenth of its capital stock.

From its organization until June 22, 1906, at which time the lawwas amended to permit a loan not exceeding 10 per cent of the capitaland unimpaired surplus of a national bank (act of June 22, 1906,34 Statutes, 451), the plaintiff bank constantly violated the provi-sions of the law in this respect.

After its first report the then Deputy Comptroller by letterof August 29, 1896, called attention to three such excess loans, aggre-gating more than $380,000, the lawful limit of each loan being$50,000. From this time on the bank's offenses in this respect grewsteadily worse, and until the law was amended every examination ofits affairs showed flagrant violation of this provision of the law. InNovember, 1903, these excess loans, fifteen in number, amounted tomore than three million dollars, or three times the total capital of thebank, or one and one-half times its capital and surplus. The ActingComptroller by letter of June 6,1906, to the plaintiff bank, just before


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the amendment of the law, calls attention to the fact that such excessloans then exceeded the sum of $600,000.

While the bank through the ten years in question openly and con-tinuously violated this law there were several occasions when itapparently attempted to conceal certain of its violations.

In 1903 loans in the name of one D amounted to $165,937.18.The said D apparently desiring to borrow a further sum of$250,000, the plaintiff bank for some reason deemed it unwise to loanthat sum to him in his name, but procured five of its clerks each tosign a note to the bank for $50,000, and D deposited with eachnote 420 shares of stock of the Capital Traction Company owned byhim. The said notes were dummy notes and were given by personsfinancially irresponsible, and were made for the purpose of concealingsuch excessive loans. The then Acting Comptroller by letter of April27, 1903, admonished the bank that the excessive loans to D(then amounting to $415,937.18) should be reduced, and that saiddummy loans for his benefit in addition to being excessive wereinadequately secured.

According to the Comptroller's letter of December 1,1905, the loansto said D still aggregated $366,000 at that time, and the bankwas advised that it was out of all proportion to its capital, and wasdirected to reduce them, together with ten other excess loans—thetotal aggregating $1,878,193.52, equal to 85 per cent of its then totalcapital and surplus—to the lawful limit without unnecessary delay.

Between the date of this letter of criticism and the next examina-tion of the bank, as appears from the Acting Comptroller's letterof June 6, 1906 (just a few weeks before the amendment of thelaw), the bank, still openly carrying four excessive loans, in viola-tion of the law, went through the form of splitting up the said loanto D and three other excess loans (the four aggregating over$800,000) into smaller accommodation notes for amounts within thslimit. In the last-mentioned letter the bank was admonished thatthe law could not be evaded by such indirect methods.

A number of these excess loans, made from 12 to 15 years ago,still remain in the bank. At least two of them, approximating$275,000, are quite doubtful. As to one of these loans, amounting atthe time of the examination in May, 1914, to $170,203, since theinvestigation made by this defendant the plaintiff bank has chargedoff to loss the sum of $20,203.71, thereby reducing the amount of theloan to $150,000.

A table showing the amounts of such excess loans from 1896 to1906 is made a part hereof as Exhibit B.


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9 4 2 REPOET OF THE COMPTROLLER OF THE CURRENCY.

3. STOCK INVESTMENTS.

Plaintiff bank invested large sums in stocks of other corporations,particularly during the years 1896 to 1906.

As early as April 28, 1898, the plaintiff bank was advised by thethen Comptroller that the Supreme Court had decided in October,1896, in California National Bank vs. Kennedy (167 IT. S., 362) thatthe power to purchase or deal in stock of another corporation is notconferred upon national banks, and that such a deal was consequentlyultra vires. The bank was thereupon directed without further delayto dispose of all stocks and purchases for investment then ownedby it.

Again, on May 1, 1902, the Comptroller called attention to thelaw, and directed the bank to dispose of stocks in a number of cor-porations then held by it. Among the stocks so held were shares infive local fire insurance companies and in two local title insurancecompanies. Notwithstanding repeated admonitions to the sameeffect, contained in practically every letter written in the years 1903,1904, and 1905, the plaintiff bank continued to hold large amountsof stocks.

Between the report of December 1, 1905, and the next examinationin 1906 the bank made a colorable effort to clean house. As withcertain excess loans, it again used the device of a dummy note. Oneof the clerks of the bank was directed to and did give his note tothe bank for $19,563.30, and the bank placed with this note as securitycertain of the title insurance and fire insurance company and otherstocks held by it.

By letter of June 6, 1906, the Acting Comptroller called attentionto this device—the said note then amounting to $11,039.88—andinformed the bank that the transfer of these securities to loans anddiscounts was not a disposition thereof. The bank was directed torestore the securities to the account of " bonds, securities, claims, etc..'*and to so carry them until regularly disposed of.

Notwithstanding this admonition, the bank still refused to disposeof a greater part of the stock in said title insurance companies.

Upon receipt of the above-mentioned instructions, the plaintiffbank, on June 8, 1906, restored to the bonds, securities, claims, etc.,account on its ledgers the stocks of said title insurance companies.Instead of promptly disposing thereof, the plaintiff bank openly heldthe same until 1912, when, under dates of June 10 and October 9,1912, it transferred said title insurance company stocks to the accountof Flather & Flather, crediting itself with the value thereof.

In fact, the said stocks are now and always have been the prop-erty of the plaintiff bank and have been held in this indirect man-


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ner for the purpose of evading the law. A table of unlawful invest-ments of the plaintiff in stocks is Exhibit C hereto.

Among the stocks which the bank was directed to dispose of inMay, 1902, was a large block of stock in the Capital Traction Com-pany, of which Mr. Glover was for many years the vice president,and which at about that time was a heavy borrower from the bank.

At the same time the bank held as collateral security for an excessloan made by the borrower another block of stock in the same com-pany, which did not stand in the name of the bank or its officers.Finally during 1904 and 1905 the bank gradually sold stock which itheld as collateral security, substituting therefor the stock standingin the name of its officers, and which it had owned for many years.The result was that the officers of the plaintiff bank still appearedupon the books of the Capital Traction Company as owning a largeamount of its stock.

4. EXCESS LIABILITIES.

In April, 1903, at which time the capital stock of plaintiff bankwas $1,000,000, and which sum therefore was the limit of its lawfulborrowings, the Acting Comptroller wrote the cashier of the plaintiffbank as follows:

Upon examination of the report of condition of your bank forApril 9, 1903, it is found that the liabilities of the bank for U. S.bonds borrowed amounted to $3,100,000, an amount greatly in excessof the capital stock.

Your attention is called to section 5202, U. S. R. S., which pre-scribes that—

" No association shall at any time be indebted, or in any way liable,to an amount exceeding the amount of its capital stock at such timeactually paid in "—except on account of certain demands therein named.

The above liabilities should therefore be reduced to the lawfullimit without delay. You are requested to advise this office when thishas been done.

The bank's violation of this statute occurred as follows:Prior and up to April 16th, 1903, Milton E. Ailes had been Assist-

ant Secretary of the Treasury and in charge of the fiscal bureaus.Prior to April 11th, 1903, the plaintiff bank had the sum of $100,000

of Government funds on deposit with it. On that day said Ailes, asActing Secretary of the Treasury, caused to be deposited with plaintiffbank the sum of $2,900,000 of Government funds, said sum beingwithdrawn from the National City Bank of New York. Section5153, R. S. U. S., requires deposits of Government funds in nationalbanks to be secured by the deposit with the Treasury Department ofapproved securities. The plaintiff bank borrowed from the NationalCity Bank United States bonds of the par value of $2,900,000 and


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944 REPORT OF THE COMPTROLLER OF THE CURRENCY.

deposited the same with the Treasury Department as security for saidGovernment funds. As was the custom, no interest was paid to theUnited States on its funds so deposited with the plaintiff bank.

On April 16th, 1903, five days after he had caused said deposit tobe made with plaintiff bank, said Ailes resigned his office of AssistantSecretary of the Treasury and on that day became vice president ofplaintiff bank and the Washington representative of said NationalCity Bank, presumably having arranged to become associated withsaid banks before he caused said Government deposits to be madewith it. Immediately after receiving this deposit of Governmentfunds the plaintiff bank redeposited a similar amount with saidNational City Bank.

The Acting Comptroller's letter of November 11, 1913, called at-tention to another similar violation of section 5202 by plaintiff bank.In October, 1913, said liability of plaintiff bank amounted to over$2,000,000; and in May, 1914, it amounted to over $1,500,000.

5. DEFICIENCIES IN RESERVES.

Sections 5191 and 5195, R. S. U. S., provided that a national bankin a reserve city (Washington being such a city) shall maintain acash reserve equal to 25 per cent'of its total deposits; that one-halfof such reserve must be in cash in the vaults of the bank, and thatthe other half may be deposited in national banks approved by theComptroller and situated in one of the three central reserve cities.

Practically continuously from January, 1910, to January, 1914, thereports of condition filed by the plaintiff bank with the Comptrollershowed a shortage in its cash reserve averaging more than $150,000—the shortage June 4, 1913, amounting to $500,363. Said reports alsoshow throughout the said period a further average shortage in itsreserve for the period of thirty days prior to the date of practicallyevery report of condition of the plaintiff bank. Attached hereto,marked Exhibit D and made part hereof, tables showing the amountand percentages of said deficiencies.

Said section 5191 provides that if a national bank shall for aperiod of thirty days fail to make good its deficiency in reserve,after notification from the Comptroller to that effect, the Comptrollermay, with the concurrence of the Secretary of the Treasury, appointa receiver to wind up its affairs.

6. REAL ESTATE LOANS.

The National Bank Act does not authorize the lending of moneyupon real estate security. It was held by the Supreme Court of theUnited States in 1896 (in Bank vs. Matthews, 98 U. S., 621) thatsuch loans are ultra vires and unlawful on the part of the bank, and


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this ruling was promptly brought to the attention of the officers ofthe bank by the then Comptroller. The bank's only power to holdreal estate as security is and was such as shall be mortgaged to it ingood faith by way of security for debts previously contracted. Sec-tion 5137, E. S. U. S.

Until 1910 it was the ruling of the Comptroller of the Currencythat a bank could not lawfully loan money on "a note secured bymortgage or deed of trust on real estate, nor on a note for whichthere was given as collateral security another note secured by mort-gage or deed of trust on real estate.

From its organization plaintiff bank has continuously violated thelaw in this respect, notwithstanding repeated admonitions .from theComptroller of the Currency to desist.

By letter of September 14, 1899, to the plaintiff bank the thenComptroller called the attention of plaintiff bank to the fact that ithad loans secured by real estate mortgages amounting to $310,338.40,

"While in your sworn report of condition for June 30, 1899, noamount appeared in the schedule of loans and discounts secured byreal estate mortgage, although about the same amount was then held."

On March 12, 1900, the Deputy' Comptroller called attention tothe fact that the bank then held some sixty-three loans amountingto $282,405.65; that the loans were made upon notes discounted for" the makers of other loans running to the makers, which latter noteswere secured by real estate mortgage, and that the bank accepts thismortgage as collateral on these notes for discount; in many casesthe only real estate involved is the real estate mortgage; and thatthe said loans are in contravention of section 5137, R. S. U. S., andthat the practice of making them should be discontinued."

October 17, 1900, the Acting Comptroller called attention te thefact that these loans had increased to $435,904.04.

May 9, 1901, the Deputy Comptroller called attention to the factthat these loans still amounted to about $400,000, the security forthe greater proportion running to the employees of the bank.

Further attention was called to these loans made in contraventionof law in Comptroller's letters of October 25, 1901; May 1, 1902;October 27, 1902; April 27, 1903; November 19, 1903; April 29,1904: October 22, 1904; May 3, 1905; December 1, 1905; June 6,1906; and June 24,1908.

7. DIRECTORS' OATHS.

The law requires that each director of a national bank with acapital stock of more than $25,000 must own in his own right at least

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ten shares of its capital stock, and that he must take an oath stating,among other things, that such stock is not hypothecated or in anyway pledged as security for a debt. (Sections 5146 and 5147, R. S.,U.S.)

On November 23, 1914, this defendant, in order to ascertain thecondition of the plaintiff bank in this respect, called for informationfrom the directors with respect to their oaths of office. The let-ters in response to said call showed that one of the directors ofthe plaintiff bank had pledged as security for a debt ten shares ofstock, being the only stock that he owned in the bank, which wasthe sole basis of his qualification as a director, and that during theyears 1912, 1913, and 1914 the said director had falsely made oaththat his stock was not pledged or hypothecated.

While the reports of condition of the plaintiff bank required bylaw made during the years 1912, 1913, and 1914 under oath showedover 1,100 shares of stock owned by its vice president, Ailes, each ofwhich statements was signed and attested by the said Ailes, hisletter of December 1, 1914, in response to my request, showed thatthe said Ailes owned in the year 1912 but 180 shares and in theyears 1913 and 1914 but 110 shares of stock in the plaintiff bank.

At one time the said Ailes had held some 2,380 shares of stock inthe plaintiff bank which belonged to the National City Corporation,but upon the dissolution of that corporation 500 shares of said stockhad been purchased by Frank A. Vanderlip, but was still held inthe name of said Ailes, and over 500 other shares of said stock stand-ing in the name of said Ailes was owned by individuals connectedwith the National City Bank and formerly stockholders in the Na-tional City Corporation. Why the said stock was still held in thename of said Ailes upon the plaintiff's books was not explained.

As to the stock in the plaintiff bank owned by its vice presidentFlather, and its cashier, it appeared from their letters that at alltimes each of them owned ten shares of stock free from incumbrance.but neither was able to designate any specific certificate as repre-senting the unpledged shares. This was due, I believe, to the factthat so large a part of their stock was pledged by them as securityfor loans.

In addition to these violations of law on the part of the bankother practices of doubtful propriety were shown,

8. LOANS TO TREASURY DEPARTMENT OFFICIALS.

Throughout the time from its organization until the appointmentof this defendant as Comptroller of the Currency, his predecessorsin that office, after practically every examination of its affairs, were


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called upon to admonish the plaintiff bank of some violation of lawshown by such examination. Such letters of admonition were notwritten during the period from 1908 to 1913, for the reason, as Iam informed and believe, that in 1908 the preexisting practice ofthe Comptroller's office of writing letters of criticism to banks wassuspended and admonitions and instructions were given by the ex-aminers direct.

Notwithstanding the repeated admonitions given by the variousComptrollers to the plaintiff bank, the latter continued in persistentviolations of the law.

In response to calls for such reports made by me, the plaintiffbank has furnished lists of loans made by it since its organiza-tion to Secretaries of the Treasury, Assistant Secretaries of theTreasury, Comptrollers of the Currency, bank examiners, and em-ployees of the latter's office. From these it appears that throughoutits history the plaintiff bank has frequently loaned money to thoseofficers of the Government having to do with the conduct of theComptroller's office, and has loaned various sums of money to manyemployees of that office, including even the personal messengersattending upon the Comptroller. Attached hereto is a list of suchloans made to Secretaries, Assistant Secretaries, Comptrollers andbank examiners while the said officials occupied office, marked " Ex-hibit E."

On December 17, 1908, the then Comptroller of the Currency,Honorable L. O. Murray, issued an order forbidding national bankexaminers from borrowing moneys from national banks. There-after the plaintiff bank made no loans of this character to said bankexaminers.

9. DUMMY LOANS.

In addition to the dummy notes heretofore described, namely, thosemade by five clerks of the bank in 1903, each for $50,000, to repre-sent a loan of $250,000 made to one D and the note made by aclerk of the bank in 1906 for $11,039.88 to represent the stocks ownedby the bank, which it was making a pretense of disposing of, butwhich as a matter of fact had been deposited in the collaterals assecurity for the dummy note, the bank appears on frequent occasionsto have required its clerks to make notes which represented no loansto them, but moneys used by the officers of the bank in making loansupon real estate security or moneys borrowed by the officers for theirown purposes. These notes have not only been made by clerks ofthe bank, but on several occasions have been made by other persons.

Among such dummy notes is one dated April 24, 1914, for $86,500,made by a teller of the bank. It appeared from their statements


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that the officers of plaintiff bank, having an application for a loanupon real estate in Washington, caused the sum of $86,500 of themoneys of the bank to be used for that purpose, and instead ofgiving their own note therefor, directed the teller to give his notefor that sum, depositing therewith stocks belonging to the presidentof the bank. Thereafter the real estate notes acquired in this waywere sold, and the money was returned to the bank, and the note ofthe teller canceled.

In the special report of November 7, 1914, called for by me onSeptember 24, 1914, the plaintiff bank furnished a list (called TableNo. 5) of loans made by the bank since January 1,1910, the collateralfor which did not belong to the signer of the note. This list de-scribed about twenty notes made by employees of the bank, repre-senting sums ranging from $700 to $86,500 (being the note beforedescribed). The collateral attached to the notes did not belong tothe makers thereof. I believe and allege that the said notes, withthe exceptions stated below, also represented, to a large extent, sumsof money belonging to the plaintiff bank used by its officers for thepurpose of making loans upon real estate security, and which loansit is not lawful for a national bank to make.

Among said dummy notes is one for $17,500, dated April 30, 1912,signed by one Felt, who was not an employee of the plaintiff bank:this note represented a loan made to W. J. Flather, vice presidentof the bank, who furnished the securities attached to said note, andwho in this way obtained a loan from the bank for his own use andgave a note therefor which did not show the facts, nor were suchfacts disclosed to the directors or known to them when they ap-proved the loan.

When the bank was first questioned about this note, it reportedthat W. J. Flather was interested therein but not liable thereon; itwas not until this defendant called for a direct statement as to theinterest of the said Flather in this loan that the admission was madethat the loan was made entirely for said Flather's benefit, and thathis interest therein consisted in obtaining the proceeds of the note.

A similar transaction is represented by the note of one Nevius, datedAugust 22,1911, for $26,400, reduced on May 23,1914, to $24,000. Asto this loan the bank reported that its cashier, H. H. Flather, wasinterested in but not liable on it. In response to a call for specificinformation as to the interest of the said Flather, the bank reportedthat the said Flather had obtained the proceeds of this loan. It ap-peared that the maker of the note was a brother of one of the tellersof the bank, but just why the cashier used this dummy note insteadof giving his own note for the loan made to him has not beenexplained. The testimony of the said W. J. Flather a ad Henry H,


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REPORT OP THE COMPTROLLER OF THE CURRENCY. 9 4 9

Flather before the bank examiners with respect to said notes isExhibit F hereto.

10. LOANS TO OFFICERS AND EMPLOYEES.

The plaintiff bank has made numerous loans to its officers, directors,and clerks. Sometimes they were made openly and the notes of theborrowers with collateral security were given. Sometimes the noteswere not made by the borrower, but by some subordinate clerk of thebank at the direction of the officer borrowing the money. In theseinstances there was apparently nothing upon the books of the bankto show the true borrower, nor were the real facts brought to theattention of the directors of the bank.

At the time of the examination in May, 1914, it appeared that theseloans, so far as they were known, aggregated $487,000; in May, 1913,they amounted to $761,000, or one-fourth of the capital stock andsurplus of the bank.

In order to ascertain the true condition of the bank, and if possibleto learn what part these loans, both direct and indirect or dummy,had played in the real estate and stock-brokerage business of thebank; to ascertain whether the officers of the bank had charged them-selves proper rates of interest, and whether or not they had imposedin any way upon the bank or were at the present time indebted to it,on January 22, 1915, by the letter quoted in paragraph XXIX ofthe bill, I called upon the plaintiff bank to furnish a report showingall direct loans made by it since its organization to certain of itsofficers and their families, and showing also indirect or dummy orconcealed loans made for the benefit, directly or indirectly, of saidofficers.

This report the plaintiff bank has resolutely declined to furnish.Such refusal, which has been and is still being persistently maintained,was the occasion for the assessment of the penalties aggregating$5,000, the collection of which is sought to be enjoined in this action.

A list (marked " Exhibit H ") of the direct loans to the officers, di-rectors, and employees of the plaintiff as discovered from time to timeby the bank examiners is filed herewith. It does not show the dummyor concealed loans to them.

SPECIFIC AVERMENTS OF THE BILL OF COMPLAINT.

Considering the specific averments of the bill of complaint, as tothose which have not already been fully answered I say as follows:

I, II, III, AND IV.

As to paragraphs I, I I , I I I , and IV, I deny that plaintiff's recordwith the Treasury Department and with the officials of that depart-


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ment charged with the duty of supervising national banks was of thevery best, or that throughout its history plaintiff complied with theprovisions of the national-bank act. On the contrary, from its or-ganization it steadily and persistently violated that act in the manyparticulars herein set forth. From 1896 to 1908, after practicallyevery examination of the bank, the then Comptroller wrote the bankcalling its attention to its various violations of law and admonishingit to desist therefrom.

On many occasions plaintiff bank merely acknowledged the receiptof such letter, while on others it promised to obey the Comptroller'sadmonitions; but thereafter it disregarded the admonitions and itspromises and continued its persistent violation of law. Up to 1908,when the writing of such letters of criticism was for a while sus-pended, some forty-two letters of this character—not 27 as allegedby plaintiff—were written by the then Comptrollers to the plaintiff.Copies of said letters and of the replies thereto (covering about 70printed pages) will be submitted to the court, but are not attachedfor the reason that they contain matters affecting others which I feelshould not now be disclosed.

I deny that plaintiff's reports of condition have never been ques-tioned or challenged. On the contrary, said reports were oftenuntrue in some respects. As early as September, 1899, the Comp-troller called attention to the fact that the examiner had reportedloans secured by real estate of over $310,000, when the bank's swornreport of June 30, 1899, contained no amount of such loans; up to1910 the reports of the plaintiff bank with respect to its real estateloans were frequently untrue; after the opening of the Glover &Flather and Flather & Flather accounts—from January, 1907, tothe present time—the reports of the bank have been inaccurateand false in that they omitted from the bank's profits and assets andfailed to show that portion thereof carried in said accounts.

The report of condition of the plaintiff bank at the close of busi-ness March 4, 1915, set forth in Paragraph I I I of the bill of com-plaint is untrue in that it fails to show in the item of undividedprofits the assets then remaining to the credit of the said account ofFlather & Flather, which in reality belong to plaintiff bank.

V. DENIAL OF CONSPIRACY.

I deny every averment of Paragraph V. I have not conspired inany way to injure or ruin plaintiff bank or its business, and it is notand never has been my purpose to inflict injury upon the plaintiffbank. All of my actions have been in the performance of my dutiesin the premises and in the exercise of my honest judgment and dis-


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cretion, and without malice, ill will, or bias against the plaintiff bankor its officers.

VI. PENALTY ASSESSED FOR FAILURE TO FILE REPORT.

There are important laws bearing upon this subject besides thosequoted in paragraph VI, and my duties and powers under thosestatutes have already been set forth.

I deny that I have called on the plaintiff bank for imperti-nent or irrelevant reports or reports which were unnecessary to afull and complete knowledge of its condition; that I have wrong-fully subjected the plaintiff bank to the exercise of inquisitorial andvisitatorial powers or other than such as were authorized by law;that I have wrongfully assessed or am continuing or threateningto wrongfully assess penalties against the plaintiff, or that I haveassessed penalties against the plaintiff aggregating the sum of$150,000, or that I have assessed any penalty against it other thanthe one of $5,000 for its refusal to furnish the special report calledfor on January 22, 1915.

On and after June 9, 1914, as Comptroller of the Currency, I didcall upon the plaintiff bank to make a number of special reports; ineach such instance, in my judgment, the special report was necessaryin order to a full and complete knowledge of the bank's condition.

In numerous instances plaintiff bank failed to file said reportswithin the time fixed by law, and thereby subjected itself to a penaltyof $100 per day thereafter. It is true that in the hope that theplaintiff bank might file said special reports within the lawfulperiod I have from time to time called its attention to the fact thatit was subjecting itself to such liability. But the plaintiff, as allegedin the bill, did eventually file some sort of report, however inade-quate, in response to each call, except that of January 22, 1915.

But that report it persistently refused to file. Accordingly onMarch 30, 1915, I did assess a part of the penalty to which plaintiffwas subject by law for its said failure. This penalty was assessedfor the period of fifty days, from February 8, 1915, to and includingMarch 30,1915, and is the only penalty that has been assessed againstplaintiff bank.

I deny that the additional penalties to which plaintiff bank hassubjected itself by reason of its failure to file the special reportcalled for within the time fixed by law under any reasonable con-struction of the calls for said special reports amount to $150,000 orto anything approximating that sum.

Inasmuch as the plaintiff did ultimately file reports to all the calls(though at times incomplete and evasive), except that of January 22,1915, aforesaid, exercising my discretion as Comptroller of the


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9 5 2 REPORT OF 'THE COMPTROLLER OF THE CURRENCY.

Currency I have no intention of assessing or undertaking to collectany penalty on such calls, notwithstanding the fact that some ofsaid reports were not filed within the time prescribed by law, and Ihereby waive the right to assess any penalty on such calls other thansaid penalty of $5,000.

I admit that the Treasurer of the United States still retains saidsum of $5,000 interest which on April 1, 1915, became due from theUnited States on $1,000,000 of United States bonds. I deny thatsaid detention is unlawful and aver that it is in strict accordancewith law.

VII AND VIII. DEFENDANTS ACTED WITHOUT MALICE.

Referring to Paragraphs VII and VIII of the bill, I again denythat while Assistant Secretary of the Treasury, or at- any othertime, I have manifested or harbored any personal hostility or maliceto the plaintiff bank or any of its officers, or that I now harbor anysuch feeling, except that it is true that I was incensed at the unjustattacks upon my integrity and the charges that I was or could beinfluenced in my official action by personal animosity, which I knowto be unfounded.

For these reasons I was all the more alert to see to it that whilstperforming my duty in learning of and, if possible, putting an endto the violations of law on the part of the bank, my actions should atevery step be determined by a strictly just and judicial exercise ofthe powers and discretion vested in me. Because of what I regardedas the false and contradictory statements that had been made to meand to the bank examiners as herein detailed and of the character ofthe business in which the bank appeared to be engaged, my confidencein the management was shaken and I became suspicious of theirassertions and explanations.

I can not recall any acts upon which the plaintiff bases its asser-tion of malice, unless it be the act of the defendant McAdoo in ex-pelling from the Treasury a clerk in the employ of the National CityBank, or his subsequent act of requiring from all national banks thepayment of interest on all Government deposits. The facts as to bothof these acts are fully set forth in the affidavit of the defendantMcAdoo.

INTERVIEW OF DECEMBER 4, 1913 , WITH PLAINTIFF'S OFFICERS.

In November, 1913, the national bank examiner, after examiningthe affairs of the United States Trust Company, had reported thatit was in a precarious financial condition, and that unless steps were


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promptly taken to alter the then existing condition a receiver wouldhave to be appointed. The said Trust Company had deposits exceed-ing $6,000,000 with about 55,000 depositors. Should that companyfail I greatly feared the result might be disastrous, not only to itsdepositors but to other financial institutions of Washington, andin the sensitive situation which then existed might ultimately unsettlefinancial conditions generally throughout the country.

As the Assistant Secretary of the Treasury charged with super-vision of fiscal bureaus, I accordingly took every precaution in mypower to avoid the collapse of said institution, and constantly con-ferred during several days with the representatives of other financialinstitutions of Washington, including the plaintiff bank, over stepsthat might be taken to avoid a failure. The officers of the UnitedStates Trust Company entered into negotiations with officers of twoother trust companies in Washington—the Continental Trust Com-pany and the Munsey Trust Company—looking to a transfer of itsassets to one of them. The officers of said companies asked me whatthe Treasury Department would be willing to do, and I informedthem that if either of them should take over the United States TrustCompany the Government would deposit a large sum of moneythrough the national banks of the city to assist the transaction, pro-vided adequate securities be deposited with the Government to safe-guard such deposits. The same offer was made by me to the officersof both said Continental and said Munsey Company. Thereafter,late on the night of November 21, 1913, the Munsey Trust Companyarranged to take over the United States Trust Company, and on thenext day eleven national banks in Washington, including the plain-tiff bank, requested the Secretary of the Treasury to deposit for theiraccount in the Munsey Trust Company sums aggregating $1,000,000,and this was done on the morning of November 22, 1913, the sum of$90,000 being so deposited for account of plaintiff bank.

Bonds, commercial paper, and collateral loans aggregating morethan $1,600,000 were deposited with the Treasury Department assecurity for said Government deposits.

On the afternoon of November 21, and before the agreementbetween the Munsey Trust Company and the United States TrustCompany was made, a run had begun on the latter institution, andthe said agreement and the deposit of said Government funds pre-vented the failure of the latter and a probable financial panic inWashington that might have involved or embarrassed all the banksof said city.

Thereafter, on December 3 and December 4, 1913, the New YorkTribune published certain articles gravely reflecting on the abilityof the Munsey Trust Company to pay the depositors of both itselfand the United States Trust Company and containing false and


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garbled statements and inferences and criticizing both the TreasuryDepartment and myself. The Secretary was informed that saidarticles had probably been inspired by an officer or officers of theplaintiff bank.

The financial situation in Washington was then still acute. Weboth felt that articles of this character would have a tendency todisturb the financial situation, cause a, run on the Munsey TrustCompany, and* precipitate the panic which had been so fortunatelyaverted.

Secretary McAdoo thought that it would be well to invite Mr.Glover to call at the Secretary's office and ask him frankly if theofficers of his bank were responsible for the publications. The Secre-tary accordingly sent word, asking if Mr. Glover would call at hisoffice.

Shortly after Mr. Glover's arrival, Secretary v McAdoo sent forMr. Elliott and me. When we arrived, we found that the Secretaryand Mr. Glover had already had a brief talk. The Secretary in ourpresence spoke of the newspaper articles and asked Mr. Glover if hewas responsible for them. Mr. Glover protested that he was not, thathe was very particular to keep away from newspaper men, and thathe knew nothing about the origin of the articles referred to. TheSecretary then told him that if he were not responsible himself thathe, the Secretary, believed that the other officers of the bank were;and it was then suggested, by whom I do not recall, that Mr. Ailesand Mr. Flather be sent for, and a telephone message requesting themto come over to the Treasury was accordingly sent. When theyarrived, the Secretary asked Mr. Flather if he was responsible for thenewspaper articles which were the subject of the discussion. Mr.Flather stated that he knew nothing about them.

The Secretary then turned to Mr. Ailes and asked him if he werenot responsible for the publication of those articles. Mr. Ailesvigorously denied that he was, although he admitted that he hadtalked with a great many newspaper men who were at the bank fromday to day, but that he had not inspired the newspaper statementsreferred to and was in no way responsible for them. The Secretarythen said that he might be able to produce proof that Ailes hadinspired said articles, and repeated his inquiry. Mr. Ailes then asked" What articles do you mean ? " Secretary McAdoo then took thecopies of the Tribune from his desk and handed them to Ailes andsaid: " These are the articles I refer to." Mr. Ailes looked them overslowly and then said: " I believe the statements contained in thosearticles are true." The Secretary then inquired whether he had notapproved them as being true before their publication in the Tribune.Mr. Ailes reluctantly admitted that he had done so. I then said to


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Mr. Ailes that the'articles which he had approved as true were atissue of falsehoods.

Mr. Ailes then said, referring to me, "When that man was ap-pointed Assistant Secretary I rejoiced, but I have been kickingmyself ever since that I should have done so."

Mr. Ailes's manner and statements becoming offensive, SecretaryMcAdoo, without moving from his chair, said to him in a firm mannerthat he would be damned if he would tolerate such behavior, orwords to that effect, and that if Mr. Ailes persisted it would benecessary for the Secretary to ask him to leave the office.

After Mr. Ailes admitted that he had approved for publication thestatement contained in the Tribune article the Secretary turned toMr. Glover and said, " Mr. Glover, I am pleased to be able to acquityou of responsibility for the publication of the articles referred to."

The Secretary then rose from his chair to indicate that the inter-view was at an end, and Mr. Ailes and Mr. Flather walked out ofthe office, and a moment or two later Mr. Elliott and I went out, whileMr. Glover remained with the Secretary.

The statements in the bill of complaint that " the Defendant Mc-Adoo became increasingly violent in his denunciations of the officersof the plaintiff bank," and that Secretary McAdoo arose from hischair and advanced menacingly toward said Ailes and in great angershouted with a blasphemous oath, " I will order you from the office,"and then, turning to said Glover, the Defendant McAdoo said, " Mr.Glover, you know what this means to the Eiggs National Bank," areuntrue.

IX. CONFIRMATION HEARING.

As to paragraph IX of the bill of complaint, I admit that mynomination to the office of Comptroller of the Currency was bythe United States Senate referred to the Committee on Banking andCurrency of that body, and that the vice presidents of the plaintiffbank, Flather and Ailes, appeared before that committee and opposedmy confirmation. I was present during the hearing. I deny that Imade any attack, vicious or otherwise, on said Ailes. I did stateto the committee that said Ailes had admitted that he had seen andsanctioned the aforesaid untruthful attacks made on the TreasuryDepartment in the said articles published in the New York Tribuneon December 3 and 4, 1913.

I deny that before the committee reported favorably on my nomi-nation, or at any other time, I was interrogated as to whether Iwould be fair and just in my administration of the office of Comp-troller or that I fervently and solemnly assured said committee thatI could and would fairly discharge the duties of the said office, " not-withstanding the hostility between him and the officers of the plain-


1916 (Volume 2)


tiff bank." The fact is that one of the Senators in a courteous wayasked me whether I had any feeling or prejudices that would pre-vent me from fairly and justly administering the duties of the office,and I truthfully replied that I had not.

Since entering upon the performance of the said office of Comp-troller I have at all times tried to perform the duties of that officein a strictly just and impartial manner.

X. WITHDRAWAL OF GOVERNMENT DEPOSITS.

After the averments of Paragraph X the facts are set forth in theaffidavit of the defendant, the Secretary of the Treasury, which Ihave read. My connection with the matter is correctly stated therein.In my reports attached to the Secretary's affidavit I stated to theSecretary the facts with reference to the plaintiff bank shown up tothat time, which facts I then believed and now believe to be true.

XL RED CROSS DEPOSITS.

The allegations contained in Article XI of the bill of complaintregarding the circumstances under which the Eiggs National Bankceased to be a depositary for the American Red Cross are not true.The facts are as follows:

While Assistant Secretary of the Treasury I was elected treas-urer of the Red Cross by a resolution of the executive committeeOctober 18,1913. On December 10,1913, at the annual meeting, I wasagain elected treasurer of the Red Cross for the ensuing year, and onDecember 9, 1914, at the annual meeting, was reelected treasurer forthe ensuing year.

In the latter part of May, 1914, as treasurer of the Red Cross, Iascertained that the plaintiff bank, which at that time carriedthe principal portion of the accounts of the Red Cross was only allow-ing the society interest at the rate of 2% per annum on the majorportion of its balances, although it was allowing 3% per annum onone particular Red Cross account whose balance at that timeamounted to about 20% of the total of the Red Cross funds on de-posit with plaintiff. Knowing that 3% interest was being generallypaid by other leading banking institutions in Washington, I wroteto Gen. Davis, chairman of the central committee of the AmericanRed Cross, on May 29th, 1914, in regard to securing a better returnupon the Red Cross deposits. This letter was as follows:Gen. GEORGE W. DAVIS,

Chm. Central Committee American Red Cross,State, Wa?\ & Navy Building, Wrashington, Z>. V.

DEAR GENERAL DAVIS : From memorandum of the treasurer's cashfund balance on hand May 25, 1914, received from Major Coope. itappears that the Red Cross Society has $122,247.01 with the RiggsNational Bank, upon which only 2% per annum interest is being


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paid. I understand that the balance with the American Securityand Trust Company is drawing 3% per annum interest. Perhapsyou may recall my discussing this subject with you some little timeago, and I am under the impression that the suggestion was madethat the executive committee would probably pass a resolutionauthorizing or directing the treasurer to require the payment of not-less than 3% per annum interest instead of 2%, from its severaldepositaries.

May I inquire whether any formal action was taken by the com-mittee on this subject, and do you not think that the society shouldrequire payment of interest at the rate of not less than 3% ? Thereis no doubt about being able to get that rate from thoroughly strongrepresentative banks. An increase of 1% would increase the incomeof the society about $1,500 per annum on the basis of the presentbalance.

Sincerely, yours,(Signed) JNO. SKELTON WILLIAMS,

Treasurer.

In response to this letter to the chairman of the central committeeof the Eed Cross, the executive committee passed a resolution request-ing the treasurer to confer with local bankers with the view of ascer-taining the best interest allowances obtainable from the Washingtonbanks and trust companies on deposits of Red Cross funds. There-upon, letters were addressed to nine of the principal banks and trustcompanies in Washington, including the plaintiff, inviting them tomake their best offers as to interest on both active and inactive ac-counts of the Red Cross. Nine replies were received from as manybanks and trust companies. The offers ranged from 2% to 3f%.The highest bidders were another large national bank, whichoffered to pay 3£% on active account and 3f % on the inactive ac-count of the Red Cross, and a large local trust company, whichoffered to pay 3% on the active account and 3J% on the inactiveaccount. These bids came in during the month of June, but werenot formally submitted to the Red Cross committee on account of theabsence from the city of important members of the committee, includ-ing the chairman.

Soon after the outbreak of the European war in August as treas-urer I wrote a letter suggesting to the chairman of the Red Crossthe desirability of calling upon the local depositaries to provide col-lateral security for the Red Cross deposits. I felt that these fundsrepresented a particularly sacred trust and that it would be especiallyunfortunate if anything should happen to tie them up or to preventtheir payment at that time by the banks holding them, in view ofthe urgent need for these deposits for the relief work which the RedCross so promptly took up in connection with the European war.Pursuant to this suggestion of the treasurer, on August 21, 1914, theexecutive committee of the Red Cross passed a resolution requiringthe treasurer to obtain from local banks or trust companies in whichDigitized for FRASER

http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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Eed Cross funds should be deposited interest at the rate of not lessthan 3% per annum on daily balances, and also directing the treas-urer to call upon the depositaries of Red Cross funds to depositcollateral securities for the protection of the balances placed withsuch banks or trust companies.

Under date of September 26th, 1914, I wrote to Chairman Davisof the central committee a letter advising him that the plaintiff hadrefused to put up security for the Eed Cross funds. In the sameletter I reported to Chairman Davis that another certain nationalbank of Washington, the next largest national bank in the city to theRiggs, and whose offer in the matter of interest on deposits was morefavorable to the Red Cross than that of any other bank or trust com-pany, had offered also to provide satisfactory collateral securityagainst deposits and at the same time to allow more favorable interestrates on these deposits than any of the other banks which had beeninvited to submit offers, namely, 3 | % per annum interest on theinactive balance and 3% per annum on the active balance.

On October 1, 1914, the executive committee of the Red Crossadopted a resolution designating the national bank making thefavorable offer above referred to as a depositary for Red Crossfunds.

By this arrangement the Red Cross receives 3^ per cent per annuminterest on its inactive balances and 3 per cent on its active bal-ances, and at the same time gets collateral security for the moneyheld locally on deposit. Although the plaintiff bank had allowedinterest at 3 per cent per annum on a certain portion of the RedCross funds subsequent to April 1, 1913, it had only allowed 2 percent per annum interest for the entire period prior thereto duringwhich it had been a Red Cross depositary, covering several years.

The statement in the plaintiff's bill that I as treasurer of the RedCross at any time solicited and recommended the acceptance of a cer-tain offer of 3^% by a certain local national bank on active accountsand of 3 | % from a certain local trust company on the inactive ac-count of the Red Cross is untrue.

The deposits which the Red Cross had with the plaintiff bankwere not summarily withdrawn in the midst of the European warcrisis, but were only checked out as needed for use in the work of theSociety.

The average balance carried by the Red Cross with plaintiff dur-ing the six months ending June 30, 1914, was $118,972. On July 1,1914, it was $107,044. On August 1,1914, it was $101,151.

For the three months during which financial conditions were mostunsettled, August, September, and October, the Red Cross balancewith the plaintiff bank averaged: For August, $114,981; for Sep-tember, $190,883; and for October, $148,757.


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The funds were withdrawn beginning in October and were notentirely withdrawn until January, 1915.

I deny that I at any time made efforts to withdraw said Red Crossaccount from the plaintiff bank save for the purpose of securing forsaid Red Cross the most favorable interest upon and a greater pro-tection for its deposits.

XII. CALLS FOR REPORTS AND ASSESSMENT OF PENALTY.

As to paragraph XI I of the bill of complaint.On June 9, 1914, as Comptroller of the Currency I called upon

plaintiff bank for a special report regarding certain matters which,in my judgment, were necessary to a full and complete knowledge ofthe plaintiff's condition; the plaintiff bank at first delayed makingthe special report, and then filed an incomplete report. In compellingthe filing of said report and the amendment thereto in order to coverthe matters actually asked for, I was forced to and did write theplaintiff bank a number of letters. In calling for further reportswhich in my judgment were necessary to a full and complete knowl-edge of the plaintiff's condition, between said June 9, 1914, and the5th day of April, 1915,1 wrote the plaintiff bank a number of letters,some making original calls for special reports and others renewingthe calls which had not been obeyed either in whole or in part bythe plaintiff bank.

I deny that in so doing I asserted extraordinary, unauthorized,or unlawful inquisitorial or visitatorial powers, or that said calls forreports were unlawful, excessive, or arbitrary; that any of my com-munications was insulting or insolent under the circumstances dis-closed, or contained false imputations against the veracity and integ-rity of any of the plaintiff's officers or employees; that I distortedfacts or emasculated evidence, or condemned any legitimate transac-tions ; or that I composed and published libelous statements respect-ing plaintiff bank or any of its officers or employees.

The first report so called for was unreasonably delayed by theplaintiff bank. When filed it was incomplete and a further report hadto be called for to furnish the matter covered by the original call. Inother instances the reports were delayed. The reports and theletters with reference thereto of the plaintiff bank and its officersat times were evasive, and in some instances contained what I be-lieve were false statements. In order to get at the facts I was com-pelled to frequently renew my calls for reports and to state them indifferent ways and sometimes by propounding interrogatories inorder to avoid, if possible, the evasions, and to have explained, ifpossible, the contradictions and false statements made.

When certain false statements were discovered in the said specialreports and letters I called attention of the plaintiff bank thereto,


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and when certain illegal and ultra vires practices were disclosed bythese reports I condemned the same in emphatic and vigorous terms.

The law provides that a national bank which fails to make andtransmit a special report within five days after the receipt of a re-quest therefor from the Comptroller shall be subject to a penalty of$100 for each day thereafter when said penalty has been assessedby the Comptroller of the Currency.

In a number of instances where the special report was delayedbeyond the lawful period I called the attention of the plaintiff bankto the fact that by reason of its delay it was subjecting itself toliability for the penalty fixed by statute, but in the one instanceonly where the plaintiff bank has absolutely declined to furnish thereport called for, namely, that called for on January 22, 1915, haveI formally assessed a fine.

XIII TO XVI. SPECIAL REPORTS.

As to paragraphs XI I I to XVI of the bill of complaint—The call of June 9, 1914, to the plaintiff bank for a special report

was made under the following circumstances:In May, 1914, Examiner Trimble, who had recently been appointed

to duty in Washington, made his first examination of plaintiff.During that examination he reported to me that the cashier and thevice president, Flather, had informed him that the real estate businessof the bank was handled through them, that they made loans on realestate security, the business aggregating about $500,000 per year,and that the commissions, amounting to about $5,000 per year, wereretained by and divided equally between them; and that all profitsfrom the purchase and sale of securities on the Washington StockExchange went to the president and vice president of the bank, whoheld seats on that exchange; that a large portion of the loans of theplaintiff bank were secured by stocks and bonds, some of which werepurchased through Vice President W. J. Flather of the bank, thecommissions for which as aforesaid went to the personal benefit ofhimself and the president of the bank; that the examiner had pre-pared a list of loans of this class of $5,000 or over, and had sent hisassistant to the bank to ascertain and note from the latter's booksthe balances carried by such borrowers, and that the officers of thebank had positively declined to permit the assistant to note upon hislist the information desired.

I was also aware that plaintiff carried a comparatively smallamount of commercial loans; that the bank had been charged byexaminers with carrying on an extensive business in negotiating loanson real estate on commission and a stock-brokerage business.

I deemed it necessary, to a complete and full knowledge of thecondition of the bank, to ascertain whether it was still engaging and


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had engaged in a stockbrokerage business and in the business ofmaking real estate loans on commission; whether such commissions*even though the businesses were ultra vires, were received by the bankitself or had been collected and appropriated to their personal useby the bank's officers and were yet due to the bank from its officers;and whether the funds of the bank had been and were being usedfor legitimate loans to customers upon commercial paper or other-wise or were being used for the purpose of carrying securities pur-chased through the plaintiff's officers, on which the latter personallyprofited, and which purchasers were merely engaged in stock specu-lation through the bank and were not legitimate depositors thereof.

Such a report would tend to show the condition of the bank; itwould show whether the bank had earned commissions in these busi-nesses, which had been retained by its officers and which the bank wasentitled to recover. It w7ould also show whether the bank was engag-ing in ultra vires businesses and whether or not it was in position tofulfill its commercial functions in the community.

Accordingly, on June 9,1 called upon the plaintiff for a special re-port showing a list of all borrowers as of May 18, 1914, of $5,000 ormore with the collateral attached and of the statements of the averagedeposit balances of such borrowers, showing also to what extent com-missions had been charged by the bank's officers on such collateral,and whether such commissions went to the personal benefit of theofficer or to the bank; and similar information was called for as tocommissions on real estate loans negotiated by the bank's officers dur-ing the preceding year.

On June 10 the plaintiff bank acknowledged receipt of said calland said that a detailed reply would be sent as soon as practicable,but later, on June 12, declined to furnish the report called for untilthe request was submitted to the board of directors at a special meet-ing which had been called for the 18th instant.

On June 13 I wrote the bank that under the law the action of itsdirectors was not necessary in connection with bank reports and thatthe bank's expressed intention of waiting for the action of its direc-tors wTas not satisfactory. I thought it w7as my duty as Comptrollerto maintain the law and not permit the establishment of a precedenttending to greatly weaken the powers of the office.

If in each case a bank should take the position that it would notfile a report without the formal approval of its directors, the adminis-tration of the affairs of the Comptroller's office would be greatlyembarrassed and delayed and the safety of stockholders and depos-itors seriously imperiled. For this reason I called the attention ofthe plaintiff in said letter to sections 5211 and 5213, which fixed thetime wTithin which special reports should be filed. There then ensued

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several letters, the bank refusing to make the special report untilauthorized by its directors, and I again calling attention to the factthat the statute was imperative and that the plaintiff was subjectingitself to liability thereon. Finally, on June 18, the plaintiff bankwrote that its directors had authorized the furnishing of the specialreport called for. A report was filed on June 22, but did not fullycover the call. On June 23 I renewed my call for that part of thereport which had not been transmitted, and the same was filed onJuly 14.

The said reports and letters with respect thereto, filed on June 18,June 22, and July 14, state that during its entire existence no one ofthe plaintiff's officers had ever received a cent for his personal profitgrowing out of any of the stock brokerage or real estate businessesconducted by the plaintiff bank or its officers or had ever claimed orintended to claim any of the commissions earned thereby. Thesestatements are directly opposed to the affirmative statements earliermade by Vice President Flather and the cashier of the plaintiff bankthat all profits from these transactions were retained by the officersindividually.

In the course of his letter of June 18, 1914, the president of thebank undertook to outline the manner in which the stock brokerageand real estate loan businesses had been conducted, and mentionedthe accounts of Glover & Flather and Flather & Flather, heretoforedescribed. He stated that whether the officers of the bank were en-titled to retain commissions going into that account was not material,but added that no one of them had ever claimed or intended to claimany part thereof.

The said accounts at that time showed credits in the sum of $503cash and also real estate notes of the aggregate value of $38,000 andstocks worth about $11,000. In order to ascertain the true conditionof the bank, it became and was necessary to know whether this ac-count represented money and property actually belonging to the bankor to the individual officers in whose names it stood.

When the letter of the plaintiff bank of June 18 showed the dis-crepancy between the oral statement of the officers of the bank andthe written report of its president as to the beneficiaries of the profitscredited to the accounts of Glover & Flather and Flather & FlatherI became further confirmed in my view that any evidence tending toshow the actual ownership of the said funds would throw light uponthe condition of the bank, particularly with respect to whether ornot the bank was entitled to recover from its officers the credits ofsuch accounts. Therefore on June 19 I called for a special reportupon the existence of private telegraph lines in Riggs Bank connect-ing it with stock-brokerage houses, including the expense thereof


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to the plaintiff bank or by whom the expense was borne, which reportwas filed on June 22, 1914, as set forth in paragraph XIV.

Such a report would tend to show whether or not the stock-brokerage business was conducted by or in the name of or at theexpense of the plaintiff bank and thus to show the ownership of thesaid funds, and would also throw light upon whether the bank wasthen engaged in the ultra vires business of buying and selling stocksand securities on commission, a matter clearly relating to its con-dition.

In endeavoring to ascertain the true ownership of the funds insaid Glover & Flather and Flather & Flather accounts, as bearingupon the condition of the bank, I called upon the plaintiff bank andits officers to furnish certain special reports with reference thereto,and particularly to state the facts of the transactions represented insuch accounts. While the officers of the bank asserted that thebusiness represented by said two accounts had been carried on bythem as individuals, they refused to give an unequivocal answer asto the ownership of said fund. On the contrary, they replied, ifat all, that while the fund might technically and from a purely legalstandpoint be said to belong to the officers in whose names it stoodupon the books of the bank, yet none of the officers had ever claimedor intended to claim any personal benefit therefrom, and none ofthem had actually received any personal benefit therefrom.

Thereupon, and in a further effort to ascertain the true ownershipof said fund, on July 30, 1914, I called upon the plaintiff bank tomake a special report stating to whom the said fund, then to the creditof Flather & Flather, really belonged, and this question the officers ofthe bank declined to answer on the ground that it was a question oflaw to which they could hardly be expected to give an opinion underoath.

Again, on August 18, 1914, I asked whether the said moneybelonged to the Eiggs National Bank or to some other person thanto the Eiggs National Bank, and the plaintiff bank by its officersagain replied that these were questions of law about which dif-ferences of opinion might be entertained, and which could thereforeonly be determined judicially.

It seemed to me a remarkable state of affairs as bearing on thecondition of the bank when it had in its possession property of sogreat a value and was unable to state as a matter of fact whetherthat fund belongs to the bank itself or to its officers as individuals.Until that fact was determined it was impossible, to know the con-dition of the bank as affected by that transaction.

Upon all the information available, I believe and now aver thatthe said fund is and always has been the property of the plaintiffbank, and that ^he plaintiff's refusals to specifically answer the ques-


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tions relatiiig to its ownership are due to the fact that the said fundhas been accumulated in the performance by the bank of ultra viresbusinesses.

I aver that all of the reports mentioned in Paragraphs X I I I toXVI have been necessary to a full and complete knowledge of thecondition of the bank, and have been called for by me for that pur-pose only and in the best exercise of my judgment.

While, as I have already said, I believe that all of the assets inthe Flather & Flather account rightfully belonged to the plaintiffbank, the fact is that at the time of my first call for special reportson June 9, 1914, such assets, stood on the books of the bank in thename of Messrs. Flather & Flather. These assets consisted of anumber of promissory notes secured by real estate amounting in theaggregate to $38,100; of a small account of cash, and of stocks inthree corporations, the total value being more than $50,000.

Since June 9, 1914, all of said real estate notes have apparentlybeen sold, and on November 13, 1914, the cash balance of theaccount was $39,992. Since November 13, 1914, there have beencharged off against the said account bad loans of the plaintiff bank,aggregating $40,797.17. In this way practically all of the assets ofthe account, except the stocks, have been transferred to the plaintiffbank.

XVII AND XVIII. REPORTS INTERROGATORIES.

Plaintiff bank has not furnished every special report lawfully andproperly called for by me as Comptroller. I am informed and aver-that my power as Comptroller to call for special reports is not limitedto reports relating to the financial condition of a national bank, butthat such power extends to the matters before described.

I deny that in my calls for special reports or in any other way Iused my office as Comptroller with intent to impair or destroy theplaintiff bank.

It is true that in three instances in calling for special report fromthe plaintiff bank I propounded interrogatories to be answered byeach of its four principal officers; as before explained, this was donebecause reports theretofore made had been evasive and had not fullystated the facts, and the interrogatories were prepared in an effort tosecure a full disclosure of all the facts from the plaintiff bank.

It is true that the interrogatories propounded in the call of Septem-ber 24, 1914, were divided into three classes, and that the plaintiffbank and its officers were directed to make the replies to one classwithin five days, to the second class within ten days, and to the thirdclass within fifteen days; this amounted in substance to calls for threeseparate reports.


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EEPORT OF THE COMPTROLLER OF THE CURRENCY. 9 6 5

I deny that it was a physical impossibility to file the said specialreports within the time fixed or that the same could not have beenreasonably furnished within the time fixed.

XIX. LOANS TO TREASURY OFFICIALS.

As to Paragraph XIX of the bill:I admit that on November 24, 1914, December 19, 1914, and

December 22, 1914, I called on the plaintiff bank for a special reportof all loans made by it, directly or indirectly, to Secretaries of theTreasury, Assistant Secretaries of the Treasury, Comptrollers of theCurrency, and national-bank examiners, within ten years past; for asupplemental special report showing all such loans made by the banksince its organization in 1896; and for a special report of all loansmade to employees of the Office of the Comptroller of the Currency.The plaintiff bank subsequently filed the special reports so called for.

In my judgment said special reports were necessary to obtain afull and complete knowledge of the condition of the plaintiff bank,and particularly of its management and personnel.

It appeared from an examination of the reports of the bankexaminers and the letters of criticism written by preceding Comp-trollers prior to the time when the writing of such letters was sus-pended, and also from the special reports called for by me, that theplaintiff bank had committed many ultra vires acts and violatedmany of the provisions of the national banking laws; in its lettersand special reports it had asserted that many of these ultra vires actswere made known to my predecessors, and that in reply to letters ofcriticism from such predecessors some officer of the bank had calledupon the Treasury officials and explained the reasons for the com-mission of the said ultra vires and unlawful acts by it, and that theTreasury officials were apparently satisfied with said explanations.Certain o fthese ultra vires and unlawful acts, particularly in deal-ing in stocks and bonds and the negotiating of real estate loans, con-tinued down to and beyond the first call made by me for a specialreport.

A list of said loans to Secretaries, Assistant Secretaries, Comp-trollers, and bank examiners, as before stated, is made Exhibit Ehereto.

XX4 PAPER ELIGIBLE AS BASIS FOR EMERGENCY CURRENCY AND FOR

REDISCOUNT UNDER FEDERAL RESERVE SYSTEM.

The allegations of Paragraph XX of the bill refer to calls madeby me for special reports as to the commercial paper and securitiesof the plaintiff bank which could be offered by it as the basis for


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emergency currency under the Aldrich-Vreeland Act, and also callsfor schedule of commercial paper eligible for rediscount under theFederal reserve system.

In my judgment the said reports and the information called fortherein were necessary to a full knowledge of plaintiff's condition.While the reports were not filed promptly, inasmuch as they wereultimately filed, I have, as before stated, no intention of assessingany penalty thereon.

The facts and circumstances in respect to said calls are as follows:At the outbreak of the European war the Secretary of the Treas-

ury made arrangements to make immediately available to the banksof the United States, under the provisions of the Aldrich-VreelandAct, several hundred million dollars of emergency currency. Thetotal amount of such currency so issued, in an exceedingly shortspace of time, amounted in the aggregate to more than $380,000,000,and it is believed that the expeditious' issuance of this emergencycurrency stemmed and prevented a panic which might have beenunparalleled in its ruinous effects.

In order to supply the emergency currency referred to and meetthe demands of the banks the Bureau of Engraving and Printingwas forced to work 24 hours a day, and even then many banks.whichhad deposited acceptable securities under the terms of the Aldrich-Vreeland Act to secure the notes for which they had applied wererequired to wait many days before the notes to which they weieentitled could be printed and furnished them. Telegraphic orderswere coming into the department from all parts of the country,and my office was doing its utmost to meet these demands and relievethe necessities of the banks to the fullest extent and as quickly aspossible.

While these urgent demands for circulating notes were at the high-est, on or about August 6th, an order was received from the plaintiffto expedite the delivery to it of $1,000,000 of additional currency.The records of the office showed that there was already on handavailable for the use of the bank approximately $200,000 of notes.These notes on hand, from the rate at which the bank had used thecurrency during the prior 12 months, would have been sufficient tosupply the bank for about 3 months, for all purposes except for anynew notes which it might require under the Aldrich-Vreeland Act.Therefore I thought it proper to ascertain whether the plaintiff hadsecurities available which it could put up as a basis for the issuanceto it of $1,000,000 of additional notes before giving its order prece-dence over orders which had been received from other banks whonot only had securities available for but who had, in many cases,already deposited with their respective currency associations thesecurities in anticipation of receiving the notes.


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Therefore, on August 10, 1914, I called upon the plaintiff bankfor a list of all securities, including commercial paper owned by itupon which additional currency could properly be issued under theAldrich-Vreeland Act. On August 15th the plaintiff submitted whatwas claimed to be a schedule of commercial paper owned by it andon hand as of August 6, 1914; also a list-of all securities owned byand on hand as of August 10th which it regarded as the class ofsecurities upon which additional currency could properly be issuedunder the Aldrich-Vreeland Act.

This list included a large amount of paper which was obviouslyand clearly not commercial paper or the class of paper contemplatedby the Aldrich-Vreeland Act; it embraced accommodation notesand real estate notes.

Thereupon on August 18th, I wrote asking the plaintiff bankwhether this list included " only notes representing actual commer-cial transactions" and for other information with respect to anysecurities which it might have as collateral for such notes. Thisinformation was not then furnished in response to said letter.

The Federal Reserve System was inaugurated on November 16.1914. It was believed that comparatively few further requests madeby banks generally for the issuance of emergency currency underthe Aldrich-Vreeland Act would be granted, because under the newsystem the banks might obtain additional funds when needed byrediscounting their commercial paper with the reserve banks andthe currency associations through which the emergency currencywas issued were soon to be dissolved. The plaintiff bank's state-ment of condition as of October 31, 1914, had showed that about75% of its total loans and discounts were made upon the securityof stocks and bonds, which loans were not discountable at theFederal Reserve Bank. I therefore thought it desirable to ascer-tain just what amount of commercial paper eligible for rediscountwas owned by the plaintiff. I thereupon enclosed to the plaintiff acopy of the regulations of the Federal Reserve Board, describing theclass of paper eligible for rediscount, and called upon it for a sched-ule or special report showing the amount of such paper owned by it.

On November 28th the plaintiff forwarded a schedule of paperheld by it as of October 81, 1914, which the bank said it had regardedas commercial paper eligible for rediscount with the Federal reservebank prior to the promulgation of the circular defining such paper.The plaintiff stated that it was unable to assert that the paper didin fact arise out of actual commercial transactions or that it met therequirements of the act, and that the only way it could find out suchfacts was to communicate with the makers of the paper. I did notfeel that it was necessary to ask this to be done at that time, and


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9 6 8 REPORT OF THE COMPTROLLER, OF THE CURRENCY.

wrote the bank that this office would not ask it to take this step,but left the decision as to that course to its board of directors.

XXI. REPORT ON BORROWED BONDS.

The plaintiff's report of condition as of October 31, 1914, showed$900,000 of United States bonds borrowed; said report also showed$400,000 on special deposit with the National City Bank of NewYork, which sum was counted as part of the reserve of the plaintiffbank.

I called for a special report from the bank which would show thecharacter of the loan of said bonds and whether there was anyrelationship between said loan and said deposit of $400,000. Suchinformation would clearly relate to the condition of the bank withrespect both to said bonds and to said deposit, and whether or notthe said $400,000 could properly be classed as a portion of the bank'sreserve or whether it was tied up as security for the bonds borrowed.

XXII. DIRECTORS' OATHS.

As to paragraph XXII of the bill, it is true that on November 23,1914, I called upon the plaintiff bank for a special report on theoaths of the plaintiff's directors, and that I stated that I had reasonto believe that in some cases the oaths had been violated. The returnsmade to this call justified my belief, and showed that at least oneof the directors for a period of three years past was disqualified,and that during each year he had falsely made oath that he ownedten shares of stock free and unpledged for debt, when in fact through-out that period all his stock had been pledged as security for debt.The facts with respect to this call and the reports in response theretoare more fully set forth in paragraph 7 hereof.

Whether the directors of a national bank are qualified or disquali-fied clearly bears upon the condition of the bank.

XXIII.

I deny every allegation of Paragraph XXI I I of the bill.

XXIV. LASSITER INCIDENT.

As to the averments of Paragraph XXIV, I admit that on Sep-tember 3d, 1914, plaintiff's cashier, Henry H. Flather, called at mvoffice and asked if it would be satisfactory if a certain special reportcalled for by me be sworn to by the cashier. I replied that I wouldprefer to have all the officers sign the report, as requested in the for-mal call.


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The rest of said paragraph is immaterial to the matters in issue andto the relief sought, but the facts are as follows:

A day or two earlier Mr. R. W. Lassiter had told me of an inter-view between himself and said Cashier Flather at the plaintiff'sbank, occurring on August 31st, in which he said that when ]Lassiterhad given my name as a reference plaintiff's cashier had been exceed-ingly rude and offensive to him.

During this call of Cashier Flather I mentioned the said incident,and said Flather stated that he would like to explain it. I requestedhim to wait until Mr. Lassiter could be present.

In the talk which ensued after Mr. Lassiter's arrival, the saidFlather questioned the correctness of the statement made by Mr.Lassiter. I stated that I thought Mr. Lassiter's statement was re-liable, and that as to the said Flather I had evidence in my posses-sion of the untruthfulness of statements made by the said Flather.

In making that statement I had reference to the report of Exam-iner Trimble to me (which had then been reduced to the form of anaffidavit), in which he said that the said Flather had claimed thatthe funds in the Flather & Flather account belonged to himself andhis brother, and were retained and divided by them, while in latersworn statements of the said Flather he had stated that he neitherclaimed nor intended to claim for his personal benefit any of saidfunds. It is true that in the course of the conversation, and referringto said Flather & Flather accounts, I stated that the plaintiff bankhad evaded stating to wThom that fund, amounting to $40,000, be-longed. The statement theretofore given to me by said Bank Exam-iner Trimble is covered in his affidavit filed herewith.

XXV TO XXVIII. ORAL EXAMINATION OF PLAINTIFF'S OFFICERS.

As to Paragraphs XXV, XXVI, XXVII, and XXVIII of thebill this defendant says the semiannual examination of the plaintiffbank was begun on November 13, 1914, but the bulk of the examina-tion wTas completed within the period of a week or ten days.

However, in view of the many irregular and unlawful acts alreadyshown by the special reports and earlier examinations of the plaintiffbank to have been committed, and in order to obtain a full knowledgeof its condition, both with reference to its finances and its manage-ment and the character of men who had managed its affairs since itsorganization and who were still in control of its affairs, I directedthe bank examiners to make a full examination into certain additionalmatters, and because of the evasive and unsatisfactory character ofthe special reports, including the answers to specific interrogatories,I asked the said examiners to orally interrogate the officers of thebank with reference to certain matters relating to the condition of thefinances and management of the institution. For this purpose and as


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bearing on the condition of the bank, the examiners on the 6th, 11th,and 15th days of January orally examined the officers of the plaintiffbank with respect to matters which in their judgment and in myjudgment related to the condition of the bank with respect to itsfinances and management.

The plaintiff bank did furnish to the bank examiner one of theprinted copies of certain of the correspondence between it and thisdefendant, who gave it to me. I deny that I*exhibited said printedcopy to anyone not properly entitled to see the same.

The bank had refused to furnish from its books and records theinformation asked for in the call of January 22. Some of its answersto other calls and to questions put by the bank examiner had beenfound to be untrue and contradictory. I felt it necessary that afurther investigation should be made to determine the true facts inthese matters relating to the condition and practices of the plaintiffbank; and as the destruction or mutilation of its records might makethis impossible, on February 26, 1915, I notified the plaintiff banknot to destroy any of its correspondence or records, and called uponit for a report as to whether it had, since May 1, 1914, destroyed anysuch correspondence or records.

XXIX AND XXXI. REFUSAL TO MAKE REPORT AS TO LOANS TO OFFICERS—RESULTING IN ASSESSMENT OF PENALTY.

As to Paragraphs XXIX and X X X I of the bill:It is true that on January 14 and on January 22, 1915, I called for

special reports, the said call of January 22 being set forth in Para-graph XXIX.

Prior to this time it had been shown to me, from the examiners'reports and the special reports made by the plaintiff bank and fromthe examination of its officers by the national bank examiner, thatat various times, particularly in recent years, the officers and di-rectors of the bank had borrowed from it large sums of money byloans, in May, 1913, the loans amounting to $761,000; at the sametime I had learned that at least two of the officers of the bank atthat time were borrowing additionally from the bank some $41,000,which was concealed upon the books of the bank, being representedby notes given by persons who had signed the notes at the requestof said officers, and who had no personal interest in the loans or thecollateral deposited therewith.

It had also been shown that throughout the plaintiff bank's entirehistory it had engaged in ultra vires and unlawful businesses,through the persistence of its managing officers, and that while fora certain portion of the time the businesses were claimed to be doneby such officers as individuals, yet the bank's money had been con-stantly used in connection therewith and the bank had derived alarge part of the profits therefrom.


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KEPORT OF THE COMPTROLLER OF THE CURRENCY. 9 7 1

It therefore became necessary, in my judgment as Comptroller, inorder to show the true condition of the bank, and particularly as toits management, to know whether or not the officers of the plaintiffbank had borrowed its moneys in large sums for their own use andwhether such borrowings, if any, had been made openly and directlyin their own names, or whether the officers had pursued the practiceof using " dummy " notes of irresponsible and subordinate clerks or•strangers for the purpose of concealing their borrowings, and whethersuch " dummy " loans had concealed excess borrowings on the partof said officers; and whether on all of such loans the plaintiff bankhad collected the proper amount of interest from its officers, orwhether upon all the facts interest was still due plaintiff for them.

This information would throw light upon the present and pastcondition, management, and practices of the plaintiff bank and itsofficers and thus show the condition of the bank as to its personneland management. If it should appear from such report thatthrough a succession of years the moneys of the bank had been usedby the plaintiff's officers or their families in excessive loans to them-selves or in improper or concealed loans to themselves for -specu-lative purposes or for practices which were unlawful and ultravires the powers of the bank, it would be my duty to lay the entirematter before the directors of the bank for their appropriate actionwith respect to its officers, especially in view of the fact that theplaintiff's officers had testified under oath before the Bank examineras to the particular " dummy " loans heretofore mentioned that thebank's directors did not know its officers were getting the proceedsthereof.

Thereupon, on January 22, 1915, I called on the plaintiff bank fora special report showing all direct loans made by the bank since itsorganization to its principal officers and the members of their families,and all indirect or " dummy " or concealed loans made during thesame period for the benefit of the said officers or any of them, orwhere any of said officers got the proceeds of any of said notes.

In reply thereto the plaintiff bank, on February 1,1915, stated thatthere was at that date no direct or indirect loan to any of said officersof the bank, and that there was but one loan to any member of thefamily of an officer, which loan was for the personal benefit of themaker of the note and was fully described, but the plaintiff posi-tively refused to make the special report called for in said letter ofJanuary 22, but stated in said letter that its books were subject tothe examiner's call at any time.

Thereupon, on February 11,1915, the Deputy Comptroller repeatedthe said call and notified the plaintiff that for its refusal to furnishthe said report it was liable to the penalty in accordance with sec-tions 5211 and 5213, E. 3,


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Thereafter, on March 5, the national-bank examiner visited theplaintiff bank and undertook to examine its president, vice presi-dent, and cashier under oath with respect to the direct and indirectloans since the organization of the bank, and each of said officerspositively declined to answer his questions asked with respect thereto.

It seemed impossible for the said examiner to obtain the desiredinformation from the books of the banks by himself, without theassistance of the officers and clerks, because, as they had already •testified, the books alone would not disclose the " dummy " characterof the notes, but that could be ascertained only from the testimonyor memory of the several officers and clerks.

On March 9, 1915, I issued a call for the special report showing,among other things, all items of interest collected by the plaintiffbank from its principal officers on money borrowed for or on theiraccount from said bank during the past five years, on direct, indirect,or " dummy " loans. This information was desired to show the con-dition of the bank and the sums of money, if any, which it mightstill be rightfully entitled to collect from its officers.

The plaintiff's officers replied on March 13, 1915, stating that allloans made to any of them had been repaid, and with rates of interestnot less than the minimum rate which had been charged by them onall loans.

The plaintiff bank and its officers still declining to furnish the saidreport called for in letters of January 22 and February 11, on March30, 1915,1 assessed a penalty of $100 per day from February 8, 1915,to and including March 30,1915, in accordance with sections 5211 and5213 of the Revised Statutes, and requested the plaintiff to pay saidpenalty.

XXX. CALL FOR BY-LAWS.

On March 30, 1915, the Deputy Comptroller of the Currencycalled on the plaintiff to furnish a copy of its by-laws in effect onthat date and to state what amendments had been made during thepast year, and such call wTas promptly and fully complied with.

XXXII, XXXIV, AND XXXV. COLLECTION OF PENALTY.

As to Paragraphs XXXII , XXXIV, and XXXV of the bill,I admit that on March 31, 1915, the local national-bank examinerand his assistant delivered to the president of the bank my letter ofMarch 30, 1915, and requested the payment of the penalties thereinassessed, but that the plaintiff bank refused to pay the same; thatthereafter the defendant, the Treasurer of the United States, refusedon April 1,1915, to pay to the plaintiff the sum of $5,000, the interest


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upon one million dollars of United States bonds then on deposit bythe plaintiff bank with the Treasurer of the United States to secureits currency.

I again deny that my said acts were the result of any malice or illwill towards the plaintiff bank, or that they were in violation of mylawful powTers and duties. In my judgment the report called for insaid letter of January 22 was necessary to a full knowledge of thecondition of the bank, and upon the continued refusal of the plaintiffbank to make the said report it became my duty, as Comptroller, toendeavor to enforce the law in that respect.

I deny that the plaintiff bank since its organization has strictlycomplied with every requirement of law respecting the making ofeach and all of the general and special reports as required by saidsections 5211 and 5212 of the Kevised Statutes. On the contrary, inaddition to the allegations above made in this respect, in numerousinstances the plaintiff bank has been guilty of gross negligence anddelay in filing said reports, particularly the reports called for insection 5212, to be filed within ten days after the declaration of anydividend. An examination of the said reports shows that from Sep-tember 22, 1909, to March 8, 1915, the plaintiff bank has filed twelvedividend reports; that none of them was filed within the ten daysspecified by law; and that the delay beyond such lawful periodranged from four to fifty-four days.

XXXIII. CROCKER BOND DEAL—APPROVAL OF PLAINTIFF BANK AS RESERVE AGENT.

Paragraph XXXII I of the bill refers to the Crocker NationalBank transaction already mentioned, and the light thrown by it onthe true ownership of the commissions claimed in the Glover &Flather and Flather & Flather accounts.

In February, 1908, there had been credited to Glover & Flatheritems aggregating $56,918.54, called "commission and profits fromthe sale of United States 4% bonds." The examiners in interrogatingthe officers of the plaintiff bank about these items wTere informed byVice President Ailes, in the presence of President Glover and VicePresident Flather and Cashier Flather, that in the year 1907 theCrocker National Bank of San Francisco had requested Vice Presi-dent Ailes, of the plaintiff bank, to sell for it certain United Statesbonds, and that said Ailes had sold the bonds to the National CityBank of New York; that several months later the National CityBank resold the said bonds at a profit of over $100/)00; that thelatter bank had offered the said Ailes a commission of one-eighth percent for the sale of said bonds, but its officers, " feeling pretty goodover the transaction,5' had finally offered to divide the profits and that


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9 7 4 REPORT OF THE COMPTROLLER OF THE CURRENCY,

was done; and that the said items in the Glover & Flather accountrepresented half the profits realized from the sale of these bonds.On being further questioned as to the ownership of this profit andthe reason for crediting the same to the Glover & Flather account,said Ailes asserted that plaintiff bank had no interest whatever andhad assumed no liability in the transaction, and that the transactionwas conducted solely by the National City Bank. Said Ailes alsostated that when the profit was credited to the Glover & Flatheraccount, he understood that Messrs. Glover and Flather could dowhat they pleased with it, but that he thought they were "just alittle bit too high class to take i t " personally.

f Some time after this examination I obtained copies from the NationalCity Bank of the correspondence between it and the plaintiff bankwith reference to this transaction. This correspondence showed thatthe bonds were carried by the National City Bank in a.joint accountwith plaintiff bank, and that the understanding between said bankswas that each was to share equally in the profits and losses resultingfrom the sale of the said bonds. Copies of the testimony of the saidAiles in this connection and of said correspondence are made Ex-hibit H hereto.

After obtaining this information I -wrote the letter of April 5,1915, referred to in Paragraph XXXII I and directed that myletter be read to the board of directors and that there be laid beforethe said directors the stenographic report of the examination of thesaid Ailes before referred to.

My object in so doing was to acquaint all of the directors of theplaintiff bank with the actual facts and with the accounts of Gloverand Flather and Flather and Flather and the transactions enteringinto these accounts. One of the directors present at the oral exami-nation of the bank's officers had stated that he had had no knowledgeand in his opinion none of the other directors had had knowledge ofthese commission accounts prior to the first call made by me forspecial reports.

APPROVAL OF PLAINTIFF AS RESERVE AGENT.

The concluding paragraph of my said letter of April 5, 1915, -isas follows:

Meanwhile, in view of the unsatisfactory and dangerous conditionswhich have come to light as a result of the investigation of yourbank by this office and the national bank examiner, and in view of theunreliability of statements made by your officers, under oath or other-wise, and your long-continued defiance of the law and disregard ofthe instructions of this office, you are hereby notified that the Comp-troller of the Currency will, until further notice, refuse to approvethe Riggs National Bank as a depositary for the reserves of othernational banks.


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BEPORT OF THE COMPTROLLER OF THE CURRENCY. 9 7 5

Under the present law a bank in a town or city other than so-called reserve cities must keep an amount equal to 12 per cent of itsdeposits on hand as a reserve; five-twelfths of this reserve may be keptin national banks in one of the so-called reserve cities, among whichis Washington. In each instance the designation of a particular bankas depositary for the reserve of another bank is under the statutesubject to the approval of the Comptroller of the Currency.

The act of approving a reserve agent is one vested by law in thejudgment and discretion of the Comptroller of the Currency, and thetheory of the statute is that such deposits in national banks in reservecities shall be liquid or the equivalent of cash. In approving suchreserve depositaries it is the duty of the comptroller to consider notonly the safety of the depository and of the depositing bank, but alsothe safety of the entire national-bank system.

On April 5 I knew that the plaintiff bank was and had been thereserve agent for a large number of country banks, or banks situatedin other than reserve and central reserve cities, and that said countrybanks had as part of their reserve deposits with plaintiff severalhundred thousand dollars.

The figures show that these banks numbered 82 and that theirdeposits amounted to slightly over $400,000.

In its last regular report showing its condition, as of March 4,1915,the plaintiff showed eligible for rediscount under the Federal EeserveSystem assets of approximately $490,000, which was but little morethan the average balances of reserves kept by other banks withplaintiff.

I regarded the condition of the plaintiff as distinctly unsatisfac-tory with respect to its commercial paper and assets which wereeligible for rediscount. The bank was not fulfilling its proper func-tion as a commercial institution, but was using its assets largely inloaning upon stocks and bonds and in conducting a stock-brokeragebusiness.

At that time approximately 75 per cent of all its loans were of thisclass, which was a much larger percentage than the average of suchloans made by other national banks in Washington and throughoutthe country.

The table filed as Exhibit " F " to the affidavit of the defendantMcAdoo, herein, shows the following figures with respect to the pro-portion on June 30, 1914, of loans of this character in the plaintiffand other national banks:

Loans made on stocks, securities, etc.: Per cent.By Riggs National Bank „____ _„_—_._„ 75.33

Other national banks in Washington . 41, 65National banks in reserve cities. -__. . 39.1.3Country banks 29. 86

Average all national banks throughout the United States—___ 37.48Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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9 7 6 BEPOBT OF THE COMPTROLLER OF THE CURRENCY.

To show more specifically the condition of the plaintiff in thisrespect, it appears from special reports made by it that in May,1914, its loans and discounts amounted to $7,746,108.52. Of these,loans aggregating $5,751,798.44 were secured upon stocks and securi-ties; and of these stock loans $3,642,699 were to persons having ag-gregate deposits of only $24,567.16.

The extent to which the funds of the bank are now and have beenloaned to a comparatively few borrowers is further shown by ExhibitJ, which gives a list of some twenty-four borrowers to whom the bankwas lending as of the date of the May, 1914, examination, $1,904,417.

It appears that these loans, or the loans of which these are therenewals, are all loans which have nearly all been in the KiggsNational Bank for more than ten years past.

In these ten years the loans to these particular borrowers havepractically absorbed the entire capital stock of the bank and a largeportion of its surplus.

At the time of the May, 1914, examination, the bank examinerreported that eight of these borrowers had no deposit accounts intheir names in the bank, and the deposit accounts of four of themwere overdrawn, while the aggregate deposit balances of the remain-ing twelve of the twenty-four borrowers amounted, on June 1, 1914,to only $6,823.06, and that this amount was actually less than theaggregate amount of overdrafts of the four borrowers above referredto whose accounts were overdrawn.

All things considered, I regarded the condition of the plaintiffbank as very unsatisfactory, and the policies and methods which ithad been pursuing, contrary to both the letter and the spirit of thenational bank act and the instructions of this office, as distinctlydangerous. While unquestionably the bank was solvent, yet becauseof the ineligibility for rediscount under the Federal Reserve Systemof any considerable portion of its assets it seemed clear that shoulda financial emergency occur, the plaintiff might be put in such aposition that it would be difficult for these country banks to promptlyobtain their reserve deposits. In the exercise of my best judgmentas Comptroller of the Currency, I thought that the plaintiff bankunder the circumstances was reserve agent for a sufficient number ofcountry banks, and that until there should be a change in its methodsit would be prudent, certainly for the present, not to approve it asreserve agent for additional banks.

My conclusion was based also upon other facts disclosed by the in-vestigation into the plaintiff bank heretofore stated; the officers ofthe plaintiff bank had continuously violated the national bankinglaw; and its officers had, as I had abundant reason to believe, madeuntrue and contradictory statements to the examiners and in theirspecial reports.


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I was also moved to some extent by my knowledge of certain prac-tices of the bank and its officers which 1 considered unsound andhazardous. I knew that several of the active officers of the plaintiffbank were speculating heavily in stocks; that four of its officerswere borrowing, principally from other local banking institutionsand from a certain national bank in New York, over $750,000 onstocks and securities. It did not seem to me that such an institutionwas, all things considered, the best place for any more reservedeposits.

On these grounds, and on others based upon my knowledge of theaffairs of the bank, I reached the conclusion above set forth that Iwould not be warranted in sanctioning the extension of the businessof the bank as a reserve agent at that time by giving my approval toany further applications of that character under prevailing condi-tions. Such determination, however, did not interfere with the con-tinuance by plaintiff of its existing connections as reserve depositary.It affected, and only until further notice, further applications, asappears from the aforesaid letter of April 5, 1913.

The remaining averments of the bill of complaint are as to mattersof law.

I have endeavored in this affidavit to answer specifically and indetail all the allegations of fact contained in the bill of complaintaffecting me, without regard to the question of whether they bearupon any issue involved in this action, and to set forth the motivesand purposes that have guided me in the matters that are withinmy exclusive jurisdiction and discretion, and as to which I under-stand that I am not under any legal obligation to account in thisaction.

JOHN SKELTON WILLIAMS.

Subscribed and sworn to before me this 15th day of May, 1915.[SEAL.] JAS. N". FITZPATRICK,

Notary Public.

63367°—CUR 1916—VOL 2 62


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