First Thunder

Last year Congress granted the Securities & Exchange Commission the power to hurl thunderbolts into almost any corporation it saw fit. Instead of exercising such an Olympian prerogative, as U. S. Business fearfully predicted, SEC has proved to be a tolerant and forbearing body. Last week for the first time SEC thundered in august wrath. Object: Baldwin Locomotive Works.

One morning last October an issue of 6% Baldwin bonds was selling on the New York Curb Exchange at a premium of 11-c- on the dollar. Without warning, the Baldwin directors suddenly announced that interest payments, not on the bonds publicly held, but on those in the sinking fund, would be suspended. On that first admission of financial difficulties, Baldwin's 6% bonds took a deep nose-dive that carried them down 34 points in three days to 77-c- on the dollar.

Bombarded with complaints from irate Baldwin investors, SEC launched an investigation to determine whether 1) there had been any market skulduggery and 2) "how adequately investors in Baldwin securities had been forewarned of the increasingly precarious position of the company."

On the first count, SEC found nothing except an ''unfortunate but nonculpable" delay in putting the directors' action on the news ticker, with the result that Baldwin's home town of Philadelphia got a one-hour jump on Wall Street in the scramble to unload Baldwin securities. On the second count, SEC found that Baldwin's 1933 annual "report "misled the investing public" because the directors' action, "evidencing an impaired working capital position, came as a surprise to the investing public rather than as the acceptance of a situation long in the making."

What SEC criticized in the Baldwin report was a balance sheet which consolidated the assets & liabilities of both Baldwin and its subsidiaries. Since the locomotive business was so bad that grass was virtually growing in the Eddystone plant, cash and working capital were the most important factors in judging the value of Baldwin's bonds. And, by its balance sheet at the end of 1933, net quick assets were about $13,500,000. But: more than half of that figure was accounted for by quick assets of Midvale Co., a subsidiary in which Baldwin owned only some 60% of the stock. In reality Midvale's assets were not available to pay Baldwin's debts.

In letters to Baldwin stockholders, President George H. Houston had called attention to Midvale's significance in calculating net quick assets but not, in SEC's opinion, emphatically enough, and never at all in the audited balance sheet itself. Said SEC's report: "Even if ... assets of wholly-owned subsidiaries were considered to be those of the parent, the quick assets of this partly-owned subsidiary would have to be segregated in order to determine accurately the working capital position of the parent company, a fact essential to any adequate analysis of the position ... [of the] bonds."

Particularly incensed was SEC over the behavior of Philadelphia's venerable Pennsylvania Company for Insurances on Lives and Granting Annuities, trustee of another and senior Baldwin issue. Under that bond indenture, Baldwin agreed to maintain at all times net quick assets at least equal to its total funded debt. To SEC it seemed "fairly apparent" that the indenture referred specifically to the parent Baldwin company, not Baldwin plus subsidiaries. Had that interpretation "been insisted upon," said SEC, "it is obvious that a default in this respect would have been recognized as existing for some time past. . . . The Commission cannot but observe with regret this casualness which accompanied the assumption of the fiduciary duties of trusteeship by the Pennsylvania Company."

In all its findings, however, SEC unearthed no hint of illegality. Pennsylvania Company considered itself unfairly singled out for public censure, since it was not trustee of the junior bonds that broke so badly last autumn. President Houston's reply was: "All of Baldwin's financial statements have been prepared with the advice and approval of the best certified accounting assistance." And even SEC admitted that an "astute" investor could have spotted Baldwin's decline, which has since forced the company into a bankruptcy reorganization (TIME, March 4).

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