Business & Finance: Retreat

In his chambers high in Manhattan’s federal courthouse one morning last week, Judge Harold R. Medina paused for a minute before donning his robes and descending to a courtroom seven floors below. “Holy cats!” he said. “This is the damnedest case I’ve ever seen.” The “damnedest case” is the Government’s suit against 17 investment banking firms, charged with monopolizing the sale of $42.5 billion in security issues from 1935 to 1949 (TIME, Dec. n, 1950 et seq.).

Since the trial started under Judge Medina (and without a jury) 16 months ago, 1,200 exhibits have been introduced, more than 5,000,000 words of testimony put on the record. So far, the case has cost the defendants—and U.S. taxpayers—millions of dollars. The issues at stake are huge; if the Government wins, there will be what one expert called a “revolution” in the U.S. money market. Since the firms on trial handle the bulk of all negotiated underwritten security issues, a decision against them would permit the Government to lay down rules to change virtually all investment-banking procedures. Last week such possibilities seemed remote; it was plain that the Government’s case had been shot full of holes.

Almost since the trial’s start, Judge Medina has had a hard time finding out exactly what the trustbusters’ case is. Red-faced and quizzical, he has upbraided the Justice Department’s lawyers time & again for “shilly-shallying,” “going backwards,” confusing the issues and wasting the court’s time. Alternately benign and snappish with both sides, he has described his job, which keeps him working twelve hours a day even on Weekends, as “heartbreaking.” Once, when a defense lawyer referred to some testimony introduced on “March 17,” Medina wearily asked: “Which year?”

The Government has been forced to drop seven of its original points, along with one defendant—the Investment Bankers Association. The core of the Government’s case remains a “triple concept”: 1) certain bankers traditionally underwrite negotiated securities for certain corporations, 2) these “traditional bankers” divide a constant proportion, of any subsequent deals with the people who were in on the first one, and 3) junior members of these banking groups, when they get a deal to handle themselves, repay the big boys by asking them to join. By this “syndicate system,” said the Government, all the defendants had-conspired to restrain and monopolize trade.

As evidence of conspiracy, the U.S. first presented a list of 328 security issues dating back to 1935. The list showed that at least one of the defendants had participated in each issue named. In reply, the defendants spent $1,000,000 compiling a list of their own. The Government had left off its list hundreds of issues which none of the defendants had had anything to do with—and admitted it.

“Parallel Action.” The Government sought to prove that the “conspiracy” was achieved by “parallel action” among the defendants, i.e., that their “spreads” (Wall Streetese for markups) went up or down at the same time in the same way. The Government could show such parallel fluctuations only part of the time—and the spreads of securities floated by many non-defendants fluctuated the same way.

The Government then got down to a key part of its case: to prove that the syndicate system bound the bankers in a conspiracy. The U.S. Supreme Court has uniformly ruled that a conspiracy is less likely to exist if the trade practice under attack has been evolved to fill a functional economic need. As proof that the syndicate method was a deliberate conspiracy rather than just a gradual development, the Government said that it had been invented by the defendants in 1915. Last week came the Government’s big chance to prove this vital point.

“In the Dark.” On the stand for the third week as a Government witness was Harold L. Stuart, 70, head of Chicago’s huge Halsey, Stuart investment banking house and a longtime friend of Cyrus Eaton, Fair-Dealing financier blamed by many Wall Streeters for stirring the Government into action in the first place. Stuart was there as an expert, and Medina was glad to see him. He welcomed him as “a real live witness who can tell me about this investment-banking business . . . instead of staying in the dark, as I stayed for over a year.”

But Stuart, instead of being a star Government witness, proved just the opposite. The defendants, said he, had not created the syndicate method of floating bonds in 1915. On the contrary, his own firm had used it for at least a dozen years before that. Assistant Attorney General Victor H. Kramer was dismayed; he withdrew the Government statement that the defendants had created the syndicate system.

Then Kramer tried to weasel his way out of the hole. If he could not prove conspiracy on dozens of securities issues, Kramer hoped Judge Medina would decide against the bankers if the U.S. could show that the “defendants . . . have engaged in price-fixing for a single, particular security issue.”

About-Face. It was a complete about-face, and heavyset, rasping Defense Attorney Arthur H. Dean did not let Kramer get away with it. Dean quoted chapter & verse from a Government statement of 14 months ago: “There will be no amendment to change our course of action . . .” The Government had said flatly that the case would stand or fall on the overall conspiracy charge. Medina seemed amazed at the new turn of events. “This is the first time,” said he, “. . . that the Government [has indicated] that if it lost completely on . . . the overall conspiracy charged, they would still be entitled to a decree on an issue not charged . . . It is a pretty slippery position.” Medina forthwith adjourned the trial for a week, to let Kramer make up his mind whether he wanted to amend the complaint.

No matter what he did, the Government case, in the words of the defense, had clearly been “knocked a blow in the head.”