with such offer and sale. The order went on to point out that as a consequence of such registration full disclosure would have been made "with respect to matters which have been inadequately and inaccurately disclosed. Those matters included misleading statements of performance, failure to disclose IOS' actual control of FOF, failure to disclose IOS' actual control of FOF's investment policies and also the changes that IOS has caused and could continue to cause to be made in FOF's investment policies, and failure to disclose the various respects in which IOS profited from its operation and control of FOF.

The second charge set forth in the order was based upon staff allegations of the violation of Section 17 (d) and Rule 17d-1 thereunder arising from the joint acquisition and ownership of certain securities traded on the American Stock Exchange by International Investment Trust, another investment company controlled by IOS and certain registered investment companies in which FOF held substantial positions.

The third charge made in the order was that ICS, aided and abetted by IOS, Cornfeld, Cowett, and the president of ICS, violated Section 17 of the Securities Exchange Act-the record-keeping provision-in failing to keep and preserve the letter from Cowett already referred to, and for failing to honor the Commission's demand for copies of IOS' books and records relative to transactions with or for U.S. citizens.

Finally, by way of matters relevant to the question of public interest, the order set forth allegations describing various undisclosed arrangements established by IOS in order to benefit from very substantial amounts of brokerage commissions which IOS was able to direct to specificed broker-dealers by reason of its control of FOF and influence over the advisers of certain registered investment companies, and certain inaccurate disclosures IOS caused those registered investment companies to make relating to the arrangements. Essentially, those arrangements worked this way.

IOS directed certain registered investment companies, the shares of which were purchased for the portfolio of FOF, to effect securities transactions for their own portfolios with, or to cause a portion of the brokerage commissions on such transactions to be given up to, certain broker-dealers designated by IOS. The principal broker-dealer so designated by IOS during the years 1963-1965 was Jesup & Lamont, a New York Stock Exchange member firm.

Jesup & Lamont was selected by IOS as the recipient of these commissions because the firm then had in its employ Mrs. Gloria Martica Clapp. Mrs. Clapp was a registered representative and was credited by that firm with all commissions received by or given up to the firm as a result of the designations made by IOS. She was a citizen of Bermuda, resident of Nassau, Bahamas and operated out of what the firm described as its branch office in her home on Paradise Island in Nassau. Between July 1963 and May 1965, Jesup & Lamont realized gross commissions as a result of such directed brokerage and give-ups in excess of $1,500,000. The relationship between Mrs. Clapp and Jesup & Lamont terminated after some time and she became associated with another New York Stock Exchange member firm, bringing with her the IOS business.

For all intents and purposes, business generated by IOS or related to IOS accounted for all of her income which ultimately rose as high as 60 per cent of the total commission dollars funneled through the firms she was connected with. We understand that ultimately the net amounts received by Mrs. Clapp under this arrangement through Jesup & Lamont and other firms were well in excess of $3,000,000. When paid by her firm to her, Mrs. Clapp then arranged for the deposit with Fiduciary Trust Company, Ltd., Nassau, the Bahamas (Fiduciary), of most of the money. It was represented to the Commission's staff that this money was deposited in trust for her children at Fiduciary. It was further represented that this money was not in any way turned over or flowed through the trust to IOS or its principals.

We could never verify these representations since the trail ended at Fiduciary, But, it appeared at the very least that Fiduciary, in turn, transferred substantial sums of money to banks controlled by IOS or to banks which had material banking relationships with IOS. All of the money so routed through Mrs. Clapp was, presumedly, free of any U.S. income taxes levied on her, her firm, IOS or its American principals, Messrs. Cornfeld and Cowett. Subsequently, on the basis of trades executed for Fiduciary, Mrs. Clapp was barred by consent from being associated with any U.S. securities firm and her husband was enjoined by consent from the sale of securities in violation of the Securities Act and from violating the registration provisions of the Securities Exchange Act.

Shortly after the Order for Proceedings was issued, IOS initiated settlement discussions with the Commission's staff.

The Settlement

After a very extended period of negotiation, the proceedings were settled on May 23, 1967 when the respondents submitted an offer of settlement, under which they proposed that the proceedings be terminated without any findings, and in return consented to an order of the Commission under which they agreed to more relief than the Commission could have obtained had the matter gone to hearing and decision.

This was not a mere settlement of technical jurisdictional matters-it involved a permanent bar prohibiting IOS and its principal officers, including Cornfeld and Cowett, from conducting any activities subject to Commission jurisdiction. Under the order, the respondents were required to:

1. Withdraw the broker-dealer registration of IOS and, of course, also that of ICS. The order thereafter prohibits IOS and all of its affiliates from conducting any activities subject to the jurisdiction of the Commission.

2. Sell ICS or merge it into Investors Planning Corporation of America ("IPC"), a large distributor of mutual fund shares in the United States which IOS had then recently acquired (they chose to merge the two corporations). 3. Sell the IOS interest in IPC but only after consent of the Commission to the circumstances of the transaction and the independence of the buyer from IOS. 4. Dissolve several registered investment companies which IOS had previously organized in the United States for the purpose of serving as investment vehicles for FOF.

5. Cease all sales of any securities to United States citizens wherever located. 6. Agree that no IOS officer or employee will engage in any activities subject to the jurisdiction of the Commission and that the individually-named respondents, that is Messrs. Cornfeld, Cowett, Cantor, Lovett, Nagler, and Feld, would in no event at any time ever engage in any activities subject to the jurisdiction of the Commission.

7. Agree that IOS and its affiliates will refrain from acquiring any controlling interest in any financial entity doing business in the United States or whose activities directly or indirectly are subject to the jurisdiction of the Commission. 8. Agree that a life insurance subsidiary then owned by IOS and doing business in United States, would refrain from conducting activities subject to the jurisdiction of the Commission.

9. Agree that all investment companies controlled by IOS will operate in the future as if the limitations of Section 12(d) (1) of the Investment Company Act are applicable. This means, in effect, that unregistered investment companies under IOS control will generally acquire no more than 3 per cent of the shares of domestic mutual funds, thereby protecting such funds and their shareholders from the possibility of direct or indirect control by IOS or other possible adverse consequences which might be caused by unlimited large scale foreign holdings of the shares of such companies.

This aspect of the order was very important because present law provides no such protection, although the Commission has recommended to Congress that the Investment Company Act be amended in various ways, one of which would be to provide this type of protection in the future, and H.R. 11995 which is now before the House Committee on Interstate and Foreign Commerce would accomplish this purpose. Despite the representations made by IOS that it would refrain from any exercise of control of and refrain from causing any disadvantage to registered mutual funds, without this provision in the Order the possibility of such control still existed. In this connection, we are aware now of a situation involving a pre-existing position of FOF in a domestic registered investment company where the investment adviser of that company has complained that a redemption by FOF of its holdings in the registered mutual fund would cause injury to remaining investors in the fund. On July 2, 1969, an article in the "New York Times," reported that Arnold Bernhard, the controlling person of the investment adviser of Value Line Special Situation Fund, another pre-existing holding of FOF, indicated that sometime apparently between April and June, "the fund's biggest holder, the Fund of Funds, 'liquidated its entire position in ten days' and that this caused some difficulty because 'we had to pay them right away. . . ."

Thus, we viewed this agreement to comply with the limitations of Section 12(d) (1), as if applicable, as a very important part of the total relief achieved by the Commission.

A copy of the Commission's Order of Settlement of May 23, 1967 is attached as Exhibit E.

Finally, as a condition to the Commission's accepting the Order of Settlement, IOS agree that it would offer to refund to FOF investors who were (i) members of the Armed Forces, (ii) employees of the United States or (ii) residents of the United States the sales load they paid if they desired to redeem their FOF holdings or to allow them to exchange their holdings for shares of registered investment companies on a load-free basis.

To repeat again, we viewed the Order as far-reaching, providing more relief than would have been possible if the matter had been fully litigated.

We would like to report to the Committee on the other matters concerning IOS that the Committee specifically asked about.

Other Matters Involving IOS

Since the termination of the administrative proceeding against IOS in May of 1967, we have had a number of other matters involving IOS, its affiliated organizations and their officers. These matters reveal a continuing involvement on the part of IOS with American companies and foreign companies traded in our securities markets. For example, in August this year, we obtained a permanent injunction in Federal court against IOS and affiliates with regard to violations of the provisions of the Securities Act of 1933, which requires the registration of shares to be sold in a public distribution. The injunction, which IOS consented to without admitting the allegations, is far reaching in that it bars the unregistered sale of any securities in our markets. It resulted from an investigation concerning the sale of shares of Revenue Properties Company, Limited, a Canadian company engaged in developing real estate in this country as well as Canada.

As alleged in our complaint, during the period from April 1968 through March 1969, certain controlling persons of Revenue Properties sold approximately 1,000,000 shares of stock without any registration statement being filed. The IOS defendants purchased approximately 635,000 of these shares, at prices below the then market price. Subsequently, approximately 535,000 unregistered shares were sold by IOS at a profit of several million dollars. At least 40,000 of these unregistered shares were sold on the American Stock Exchange. In light of developments concerning the company which came to light subsequently, trading on the American Stock Exchange has been halted since April 21, and there is at present no indication whether or when trading will be resumed.

There is also presently pending before the Commission, staff charges that IOS and certain of its affiliated persons violated certain of the anti-fraud and Investment Company Act provisions of the Federal securities laws. Because the matter is pending before the Commission it would be inappropriate to discuss this case at length. Essentially, the staff has alleged that IOS and companies under its control unlawfully shared in brokerage commissions and other monies arising out of portfolio transactions effected on behalf of The Fund of America, Inc., a registered investment company then controlled by IOS. The staff has alleged also that similar practices were employed in connection with transactions of FOF and other foreign-based investment companies under the management of IOS.

We also know of several instances where IOS has participated in the management of publicly-owned corporations. In one case involving Commonwealth United Corporation, a conglomerate, IOS, in order to protect its interests as a $40 million creditor of the company, in the summer of 1969 provided the company with an additional $10 million worth of financing. At the time, the company was experiencing severe financial problems. In connection with the infusion of this additional money, IOS required that Commonwealth permit three IOS designees to join the company's board of directors and also required that two of the three be given control of the company's three-man executive committee. These persons managed and operated the company for a period of approximately three months at which time arrangements were made to bring in a new management group. Before this was effected, however, IOS and its designees arranged to be substantially compensated by Commonwealth. Included in the compensation to be received were warrants and options to purchase 1,450,000 shares of Commonwealth common stock as well as substantial cash compensation. Just prior to a recent mailing of proxy materials we inquired into these arrangements as well as the disclosures reflecting them. For example, questions were raised

whether the arrangements were negotiated on an arm's length basis and whether the IOS designees on Commonwealth's Board were negotiating for IOS and themselves as well as for Commonwealth. After these questions were raised, certain aspects of the arrangements were revised and the disclosures were modified. Among other things, under the arrangements as revised, the options and warrants to purchase Commonwealth shares to be received by IOS and its affiliated persons, were reduced from 1,450,000 to 300,000 shares. However, the revised plan still calls for IOS and its designees to receive substantial cash compensation.

It should be pointed out that the Commission has had an interest in Commonwealth for some time. On October 2, 1969, with the consent of the company, Commonwealth was enjoined from further violations of the anti-fraud and proxy provisions of the Securities Exchange Act. In addition, trading in the company stock on both the American Stock Exchange and the over-the-counter market has been suspended since August 1, 1969.

At this time, IOS is exercising control of Steel Crest Homes, Inc., a near bankrupt company, engaged in erecting low cost housing. Subsequent to the appointment of a receiver for the company under Chapter XI of the Bankruptcy Act, the Board of Directors of the company accepted an offer to turn over control to IOS in exchange for $650,000. This was accomplished by IOS Venture Fund, International, a Netherlands Antilles corporation, purchasing 650,000 shares at $1 each. By virtue of a reorganization, wherein the existing stockholders received one share of stock in place of each twenty shares they had previously owned, IOS wound up with 83 percent control of the company.

We have been provided with a list of United States securities holdings of the various investment companies in the IOS complex as of September 25, 1969. The list will be made available to the Committee. It indicates that on that date, IOS and controlled investment companies had positions in approximately 520 different issues of securities. These securities included common stock, convertible preferred, debentures, warrants and notes.

More than 10% of these 520 positions, some 63, are listed as constituting 4% or more of the outstanding securities of that issue. Nineteen of these 63 positions comprised 10% or more of the outstanding securities of that issue. Thus, it is quite clear that the holdings of this complex are extensive and constitute substantial positions in a number of issues.

IOS recently made a public offering of approximately $50,000,000 of its shares outside the U.S. to other than U.S. Citizens-the stated purpose of which was to provide a market for IOS shares, apparently to allow the individuals in control of IOS an opportunity to sell part or even all of their interests to the foreign investing public. Also, it appears from their prospectus that they have 13,000 largely full-time salesmen and the turnover rate in their sales force is high. IOS still appears to be deriving very substantial benefits out of various arrangements it enjoys in connection with the operations of investment companies under its control, without need to provide to the investors in those companies the protection afforded investors in U.S. companies by the Investment Company Act which makes such types of transactions unlawful. One of these arrangements, according to the prospectus, involves the lending of FOF's own portfolio securities to broker-dealers to enable them to cover deliveries for customers who have sold securities but have not presented them for delivery by the settlement date and to lend securities to customers making short sales. Each loan is collateralized by a deposit of cash equal to the market value of the securities loaned at the time of the loan, adjusted from time to time to conform to market changes. From 1967 through December 31, 1968, it appears FOF earned gross income from this arrangement of $2,847,000 from which IOS was paid $645,000.

The recent investment record of FOF shows that its net asset value of $24.13 on December 31, 1967 declined to $21.82 on June 30, 1969. According to the Wall Street Journal of December 23, 1969, however, by a rather unusual transaction involving the sale of Canadian Arctic oil and gas exploration permits, the reported net asset value of FOF jumped overnight from $20.57 on Christmas Eve to $23.29 the next day. This represented an increase in FOF's reported net assets of $70.8 million. We have twice requested that IOS supply us with the details of that transaction but to date we have received no information from them.

Redemptions of FOF reportedly ran at the rate of approximately 40 per cent of the face amount of investment programs sold during 1967 and 1968. For the first six months of 1968, the redemption rate jumped to approximately 60 per cent.

IOS has been excluded from operating in several countries and apparently still cannot sell securities in many other countries throughout the world. In this connection, the New York Times and the Wall Street Journal of January 12, 1970 reported that IOS has been accused of illegal fund sales by the government of Greece. IOS banking activities appear to be extensive. A controlled Swiss bank and a finance company together reported holding $40,000,000 of investor's loans collateralized by fund shares purchased under the IOS Investment Program. IOS also appears to be a significant factor in connection with the Eurodollar bond offerings of U.S. corporations with much of the IOS participation in such offerings taken down by the various non-American investment companies controlled by IOS. An example of this is the IOS participation in the Eurodollar offering of Commonwealth United Corp., which we have already discussed.

IOS also has plans to expand into various non-securities activities. We understand, for example, that IOS has entered into joint venture arrangements for the exploration and development of natural resource ventures around the world. We believe, also, that FOF itself may be investing in works of art and already has substantial real-estate holdings in the United States. In another area, we have seen a news report that IOS or its affiliates may have engaged in gold bullion speculation. The IOS prospectus also indicates that IOS has a significant world-wide real-estate operation and that it has substantial plans to engage in the hotel business in various parts of the world.