Q. And those certificates were pledged by the Knockerbocker
Investment Company as collateral for loans? A. I believe so^
yes, sir.
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Testimony of Henry P. Townsley
Q. Did you take over some of the loans — you and Mr. Van
Schaick? A. We did at one time.
Q. To the amount of about thirty-five thousand dollars? A.
Yes, sir.
Q. And did you take over any of the collateral at the time —
those voting trust certificates ? A. Yes, sir.
Q. Did you take over the entire amount of the collateral ? A.
That was with the loan that we took up, yes, sir.
Q. Was that amount equal to or representing 626 voting
trust certificates? A. No, sir, not all of that.
Q. How much did it represent? A. It represented something
over five hundred shares.
Q. That is something more than a control of the bankers'
company ? A. Yes, sir.
Q. So that your position with Mr. Van Schaick was that of.
creditor of the Knickerbocker Investment Company with the
voting trust certificates representing the stock of the Bankers'
Company and security? A. Yes, sir.
Q. That was in the early part of 1904? A. Yes, sir.
Q. Did the Knickerbocker Investment Company bring a suit
to dissolve the voting trust? A. Yes, sir.
Q. Of the stock of the Bankers' Company? A. Yes, sir.
Q. You procured that suit to be brought ? A. The Knicker-
bocker Company did.
Q. What was your relation to the Knickerbocker Company at
that time — were you an officer? A. Director.
Q. Simply a director. Did you with or without Mr. Fiske
control a majority of the stock of the Knickerbocker? A. No,
sir.
Q. You were then simply in the position of a creditor of the
Knickerbocker, holding a small amount of stock, and you and
others believed that an action should be brought to break up
the voting trust of the Bankers' Life? A. Yes, sir.
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Testimony of Henry P. Townsley
Q. And upon what ground did you seek, or did the company
seek to destroy that voting trust? A. The papers in the case
will show that a good deal better than I can tell you.
MR. HUGHES: Inasmuch as the Bankers' Life Insurance
Company is one of the companies to be investigated and the
situation is somewhat complicated, I will read from the opinion
of Hamilton Odell, dated June 22d, 1905, in a suit in the Su-
preme Court, New York County, of the Knickerbocker Invest-
ment Company, plaintiff, against Foster M. Voorhees, William
Scherer and Edward C. Stokes, individually, and as voting trus-
tees, etc., and the Bankers' Life Insurance Company, defendants,
so much of the opinion as bears upon the facts in the case :
"The plaintiff" — ^that is, the Knickerbocker Investment Com-
pany — "is a New Jersey corporation. It was organized in
March, 1902, and by its certificate of incorporation was author-
ized to do a general real estate, investment, brokerage and com-
mission business — to act as agents for individuals, firms, and
corporations — to buy and sell all kinds of stocks, bonds and
other securities — ^to manufacture, purchase and sell goods,
wares, and merchandise of every description — and also 'to ac-
quire and undertake all or any part of the business, assets and
liabilities of any person, firm, association or corporation, and to
pay for the same in cash, the stock of this company or other-
wise, and to carry on any business which the corporation may
think calculated to develop its best interests.' It is alleged in
the complaint that 'the purpose of the incorporation and organ-
ization of the Knickerbocker Investment Company, was the for-
mation, ownership and control of a life insurance company,' and
in the separate answers of the defendants, Voorhees and Stokes,
it is admitted that 'one of the purposes of the organization of
said company was the contiol of the life insurance company
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Testunony of Henry P. Townsley
through the ownership of its stock.' No such purpose is stated
in terms in the certificate of incorporation. It is to be found, if
at all, in the very general and comprehensive language of the
provision quoted above.
*The Bankers* Life Insurance Company is a New York cor-
poration, it has a capital stock of $100,000 represented by one
thousand shares of $100 each. In November, 1902, the defend-
ant, \ oorhees, acting for parties identified with and interested
in the plaintiff, and now in his own behalf, secured an option
for the purchase of 626 shares of the stock of the Bankers*
Company, and at once executed and delivered to the plaintiff,
a declaration that he had procured such option for the plain-
tiff's benefit, and that upon complying with the terms of the
option the plaintiff would be entitled to a transfer of said shares.
The plaintiff accepted the option and purchased the stock, and
a few weeks later after the happening of events, which need not
be recited here, a voting trust agreement between all the stock-
holders of the Bankers' Life Insurance Company who should
become parties thereto, by signing the same, parties of the first
part, and the defendants, Scherer, Stokes and Voohees, parties
of the second part, was entered into and executed by the plain-
tiff and the three second parties, by which the said second parties
were constituted voting trustees of the stock of the parties of the
first part and issue 'stock trust certificates/ Therefore, and to
have and be entitled to exercise during the said five years 'all
rights of every name and nature including the right to vote in
respect to all such shares deposited.' The 626 shares which be-
longed to the plaintiff were deposited with the trustees pursuant
to the said agreement, and were voted by them at the annual
elections of directors of the Bankers' Life Insurance Company
in the years 1903 and 1904. No other act has been done or at-
tempted by the trustees as holders of said stock.
"This action is brought to obtain the removal of the trustees
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Testimony of Henry P. Townsley
'for violation of their fiduciary trust toward their cestuis que
trustent^ and to have the voting trust agreement 'declared null,
void, and of no effect, having been conceived and executed in
fraud of the rights of the Knickerbocker Investment Company/
The complaint abounds in charges of conspiracy and fraud
against Scherer and Stokes and Voorhees. It is alleged that they
conceived a scheme for acquiring personal control of the Bank-
ers' Life Insurance Company *with its consequent personal bene-
fits to themselves;* that in the prosecution of said scheme, Stokes
and Voorhees, by false representations, willfully made, induced
the directors. of the Knickerbocker Investment Company to pur-
chase the 626 shares of stock, and then to enter into the Voting
Trust Agreement, naming the defendants Voorhees, Stokes and
Scherer as trustees;' that in further prosecution of said scheme,
the three conspirators voted themselves in as directors of the
Bankers' Company at the annual election held in January, 1903,
'and voted in other persons as directors, who were their blind
tools and figureheads, and who would do their bidding as direc-
tors;' that having obtained control of the directorate, they pro-
ceeded to vote themselves and their kindred into profitable of-
fices, and use their positions and voting power for their own
benefit, in violation of the trust imposed in them, Voting them-
selves large and unreasonable salaries' and doing other dishonest
and disreputable things, with the result that the business of the
company was largely reduced, and its stock was largely depre-
ciated in value. Not one of the allegations of collusion or con-
spiracy or fraud has been shown to be true. It is' due to these
defendants to say that the proofs utterly fail to show any con-
certed action on their part, or any plan or scheme conceived
or contrived by them, or any false representations or fraud, or
any possession or control by them of the directors of the Bank-
ers' Company, or any misuse or abuse of the voting power, or
any other misconduct or violation or neglect of duty, either as
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Testimony of Henry P. Tozcnsiey
voting trustees, or as officials of the company. Nor, am I able
to discover anything in the record before me, which will per-
mit of finding that any misfortune that may have overtaken the
Bankers' Life Insurance Company — any decrease of business or
loss of surplus, or shrinkage in the value of its stock — is properly
or fairly chargeable to these voting trustees, either directly, by
reason of their own acts or omissions, or indirectly through any
unfitness or incompetency, or infidelity or negligence or other
defect, moral, mental or physical, of the directors they selected
and elected to manage the company's affairs. It is plain, I think,
that if relief is granted to the plaintiff in said action it must be
for some otiier reason than fraud or other misconduct on the
part of the defendants.
"No other ground of action is set forth in the complaint unless
it be as alleged in the tenth paragraph, that 'there was no con-
sideration paid or given for the execution' of the voting trust
agreement. My opinion is that the proofs disclose an abundant
consideration. The facts appear to be as follows: On Novem-
ber 8, 1902, the option agreement, as it is called, was entered
into between Charles H. Fancher and the defendant Voorhees.
Fancher owned 125 shares covered by the option, the other 501
shares were owned by Demarest. The price to be paid by Voor-
hees was $300 a share, amounting to $187,800. Of this sum
$30,000 was paid on the signing of the agreement. As to the
balance the agreement provided that $82,000 should be paid
within ninety days thereafter, and that Fancher should procure a
loan for Voorhees of not more than $75,000, 'with which to make
up and pay the sum remaining due, such loan not to extend be-
yond a period of four months from the time of making such loan,
and the stock to be deposited as collateral for the payment
thereof;' and it is expressly agreed, that in case Voorhees should
not complete the purchase of said stock according to the terms
of the option, the $30,000 should be forfeited — ^the agreement
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Testimony of Henry P. Townslcy
declaring that it was paid *as the purchase price of the option
hereinbefore given* — to be applied however, as a payment on
account in case the purchase was completed. On the same day
(November 8th), Voorhees executed and delivered to the plain-
tiflF, a writing over his hand and seal, in which he declared that
he had procured the option for the benefit of the said Knicker-
bocker Investment Company, and that it, said company, upon
compliance with the terms of said option, will be entitled to have
said stock transferred to it/ At a meeting held on the 21st of
November, 1902, the stockholders of the Knickerbocker Com-
pany voted without dissent to take over the option and pur-
chase the 626 shares of stock for $187,000, the directors of the
Bankers' Life Insurance Company were so disturbed by the
proposed transfer of a controlling interest in the stock to out-
side parties, that on the 13th of December they adopted a reso-
lution by which they ^placed themselves on record as unalterably
opposed to the consummation of this option for the transfer of
the control of the capital stock of this company into the hands
of Governor Voorhees or anybody else of whom we have had no
previous knowledge.' And by which they instructed the counsel
of the company, 'to take such steps as may be necessary to pro-
tect the interests of the company in this m?itter. This action
of the Board was communicated to the Knickerbocker Invest-
ment Company and to Governor Voorhees. It was not claimed,
as I understand it, that Francher and Demarest were not at
liberty to dispose of their stock to any party and upon any
terms they pleased, or that there was any legal ground upon
which the Bankers' Company could prevent the acquisition of
the stock by the Investment Company; and it may fairly be as-
sumed that the Investment Company would have paid no heed
to the Bankers' Company's resolution or protest to Demarest,
who was a director of that company, and who had not signed the
option agreement, had not given notice that he would not carry
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Testimony of Henry P. Townsley
out the option and deliver his stock unless matters were ar-
ranged to the satisfaction of the Bankers* Company. It was
during the negotiations that followed that the voting trust was
suggested as a solvent of the situation. Meantime, application
had been made by the Investment Company to Fancher, for a
loan of $15,000 in addition to the loan of $75,000, which in the
option agreement Fancher had engaged to procure for use in
making the final payment on the stock. The results were as
follows: Fancher agreed to make the additional loan; and on
December 27th, 1902, an agreement was entered into between
him and the Investment Company, which recited the option of
November 8th, and the deposit of 626 shares in escrow with the
Irving National Bank, and the assignment of the option by Voor-
hees to the Investment Company, and that 'the parties hereto
deem it for their interest that a voting trust be created, and the
voting power on said 626 shares of stock ... be lodged with
voting trustees,' and that 'the party of the first part has agreed to
procure a loan to the party of the second of the sum of $15,000,
in addition to said sum of $75,000, as agreed upon in the original
option,' and by which, 'in consideration of the premises, etc., the
Investment Company agreed to deliver and Francher agreed to
accept, as a security for said loan, and in lieu of the said shares
of stock 'stock trust certificates to be issued by the voting trus-
tees appointed under the deed of trust, now being arranged be-
tween committees of the party of the second part (the Invest-
ment Company) and said insurance company (the Bankers' Life).
On the same day upon receipt of communications, 'from the
representatives of the Bankers' Life Insurance Company, and
the makers of the option held by the Hon. Foster M. Voor-
hees on behalf of this company' the directors of the Knicker-
bocker Investment Company adopted the following resolution:
"Resolved, That the amendments to the aforesaid option,
where by the amount agreed to be loaned upon the stock of
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Testimony of Henry P. Townsley
the Bankers' Life Insurance Company, according to the terms
thereof, was increased from $75,000 for four months to $90,000,
as follows: $10,000 for thirty days and $80,000 for four months,
upon condition that the stock in the Bankers' Life Insurance
Company of the City of New York, so to be purchased and
transferred, when transferred to this company shall immediately
be retransferred to three voting trustees, according to the terms
of the agreement submitted as aforesaid, and to. receive stock
certificates, be accepted by this company in lieu of the option
as originally g^ven and accepted; 'and the officers of the Invest-
ment Company were authorized and directed to execute on be-
half of the company the voting trust agreement, upon condition
that the names of the following persons be inserted in said agree-
ment, as the voting trustees provided for therein: William
Scherer, Edward C. Stokes and Foster M. Voorhees.' On the
preceding day (December 26th), the directors of the Bankers'
Life Insurance Company acted upon and adopted the report of
the Special Committee previously appointed, which recommend-
ed 'that a Voting Trust be created for three members, one such
voting trustee to be selected by the present Board of Directors
of this company as representing the owners of the minority of
the capital stock of the company; one to be selected by the owner
of said option for the purchase of the majority of the stock, as
representing the holders of the majority of said stock; and the
third voting trustee to be the choice of those two;' and William
Scherer was designated as the voting trustee of the minority of
the stock. The matter was closed upon these terms. Demar-
est's opposition was withdrawn; the Investment Company be-
came the owner of the stock; it designated the Defendant Voor-
hees as its voting trustee; the voting trust agreement was exe-
cuted, and trust certificates were issued by the voting trustees,
and deposited as a security for the loan made to the Investment
Company, by aid of which it completed the purchase of the
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Testimony of Henry P. Townsley
shares. The facts narrated show ample consideration to sup-
port the voting trust agreement. Under the amended option
agreement the plaintiff acquired title to the stock, *upon con-
dition' that it should be immediately transferred to three voting
trustees according to the terms of the agreement, which it is
sought in this action to avoid and annul. The increased loan of
$15,000 to the plaintiff was made or procured by Fancher upon
the same condition."
Then follows a consideration of the questions of law with refer-
ence to the consideration being a valuable one and to the validity
of the voting-trust agreement under the law of New Jersey, with
citations of authority upon that point. The conclusion of the
learned referee is : "My judgment is that the complaint should be
dismissed."
Q. Now, in the spring of this year, did you, with other direc-
tors of the Knickerbocker Investment Company, form a company
known as the Manhattan Bond and Underwriting Company? A.
Yes, sir.
Q. And that company was formed under the laws of the State
of New York ? A. Yes, sir.
Q. Did that company take over $35,000 of the obligations of the
Knickerbocker Investment Company? A. Yes, sir.
Q. And does that company hold as security something over five
hundred shares of the voting trust certificates representing the
stock of the Bankers' Life Insurance Company? A. Yes, sir.
Q. Did the Manhattan Company issue a bond in exchange for
the stock of the Knickerbocker Investment Company? A. Yes>
sir.
Q. Is this the form of the bond (showing witness paper) ? A.
I should say so — yes, sir. Of course, I assume you have made
a copy of it.
Q. You and Mr. Van Schaick own practically all of the stock of
the Manhattan Company ? A. Yes, sir.
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TesHmony of Henry P. Townsley
Q. So that the Manhattan Company now stands in place as a
technical corporation of you and Mr. Van Schaick as the creditor
of the Knickerbocker Investment Company holding the majority
of the Bankers' Life Insurance Company's stock as collateral —
that is, subject to the voting trust? A. I suppose we will draw
— that would be the natural conclusion.
Q. Has this decision been appealed from of Hamilton Odell?
A. I believe so.
Q. Through the issue of these bonds of the Manhattan Com-
pany to the Knickerbocker Investment Company has the Manhat-
tan Company acquired a majority of the stock of the Knicker-
bocker Investment Company ? A. Yes, sir.
Q. So that the Manhattan Company is the owner of the majority
of the stock of its own debtor on the $3«>,ooo loan? A. Yes, sir.
MR. HUGHES : The form of the bond of the Manhattan Com-
pany I will have marked in evidence and introduced at this place.
Paper marked Exhibit No. 761.
Q. Was the Manhattan Company organized for the purpose of
obtaining control of the Knickerbocker Investment Company and
through that the control of the Bankers* Life? A. Yes, sir.
Q. Following that org^ization was there a suit brought in the
State of New Jersey? A. I believe so — yes, sir.
Q. Is there a suit now pending there? A. No, sir.
Q. When was it discontinued? A. Within two weeks after it
was brought.
Q. Abandoned? A. Well, it was dismissed.
Q. Who brought the suit? A. I believe it was brought by
Howard Stokes.
Q. It was brought on behalf of the minority interest of the
Knickerbocker Investment Company? A. Well, perhaps so.
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Testimony of Henry P, Townsley
Q. Against yourself and Mr. Fisk in the Manhattan Company?
A. I think so.
Q. Now, was a preliminary receiver appointed? A. Yes, sir.
Q. And then the suit was dismissed upon an arrangement
changing somewhat the plan which had been formulated? A.
Well, sir, I don't know about that. I understood the suit was
dismissed on an argiunent in court.
Q. Was there an arrangement made by which the obligations of
the Knickerbocker held by the Manhattan were changed to time
loans which should not mature until the expiration of the voting
trust? A. Yes, sir.
Q. And in consideration of that which made it impossible for
the Manhattan Life to sell out the collateral prior to the expiration
of the voting trust the legal proceedings in New Jersey were with-
drawn? A. Yes, I presume that may be so; I don't know; the
legal proceedings were terminated and the receiver was dismissed
and that was one of the things that transpired, but whether that
was the reason for it I don't know.
Q. Then the $35,000 against which a majority of the voting
trust certificates representing the stock of the Bankers* Life In-
surance Company stands as collateral is now in the shape of a
time loan? A. Yes, sir.
Q. Maturing at the expiration of the voting trust? A. Yes,
sir.
Q. Through the Manhattan controlling the Knickerbocker
Trust Company and through your control with Mr. Van Schaick
of the Manhattan Company you are in a position to default upon
that loan of $35,000 and have the collateral sold out, if you so
desire? A. I do not so imderstand it.
Q. In other words you control the debtor and therefore the
payment of the obligation ? Mr. Van Schaick says there is a pro-
vision in the loan that the collateral shall not be sold out, save
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Testimony of Henry P. Townsley
upon fair notice and notice to every stockholder of the Knickei-
bocker Investment Company. Was that put in as a part of the
disposition of the suit?
MR. VAN SCHAICK: Why, yes.
MR. HUGHES: A suggestion of the court?
MR. VAN SCHAICK : It was a suggestion of ourselves which
the court availed itself of.
Q. So that to sum up the situation of the Bankers Life In-
surance Company, its stock is held by voting trustees who up
to date have been confirmed in their position by the court and
the voting trust expires about 1907?
MR. VAN SCHAICK: Yes.
Q. The majority of the voting trust certificates are owned by
the Knickerbocker Investment Company?
THE WITNESS: That is right.
Q. A majority of the voting trust certificates owned by the
Knickerbocker Investment Company is pledged with the Man-
hattan Bond and Underwriting Company? A. Yes.
Q. The Manhattan Bond and Underwriting Company owns
a majority of the stock of the Knickerbocker Investment C<Jm-
pany? A. Yes, sir.
Q. And you and Mr. Van Schaick own practically all of the
stock of the Manhattan Bond and Underwriting Company?
A. That is right.
Q. When you originally planned the organization of the Life
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Testimony of Henry P, Townsley
Association of America you issued a prospectus, didn't you?
A. Issued a good many.
Q. Is that one of them (showing witness paper)? A. This
is one of them, yes, sir.
MR. HUGHES: I offer it in evidence.
Paper market Exhibit 762 and read in evidence by Mr.
Hughes.
Q. Now, did you send out with this prospectus or at any time
did you give to persons illustrations of returns to the investors?
A. Yes, sometimes.
Q. Is this one of them that I now show you? A. No, sir, I
did not make that. Some of our agents made that and sent it
out. They made out their own estimates on those things and
that is made out by son^e agent. I don't know as I ever saw
it before.
MR. HUGHES: I offer it in evidence.
Paper marked Exhibit 763 and read in evidence by Mr.
Hughes.
Q. Now, did the agents have the stock or rather the sub-
scription blanks or whatever were used in obtaining subscrip-
tions? A. I don't think so.
Q. How were the subscriptions obtained? A. AAThen they
got an application for insurance and when that was issued the
man sent his check for the stock, the stock was deposited in
the North American Trust Company and a certificate calling
for the stock was issued and endorsed by the North American
Trust Company. When that was returned to the company the
stock was issued and that was taken up.
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Testimony of Henry P. Townsley
Q. So the matter of obtaining investment in the stock was