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Mr. Lipton (reading):

As a result of this special examination into the financial condition of the Great American Insurance Company after deduction of extraordinary dividend declared on January 14, 1969, based on such reviews and checks as were available at the time, it appears there are no other substantial changes to be made in the year-end reported equity funds of the Company. The latter has significant resources to take care of its present obligations and to continue to write its former volume of premiums.

The CHAIRMAN. The entire report of the New York Insurance Department will be placed in the record.

(The document referred to appears at p. 380.)

Mr. HARKINS. Mr. Klein wrote a response to the report in a letter dated April 25, 1969, which states:

"This will acknowledge receipt of this report.

"Aside from some difference in thinking relating to matters of opinion, we have no objection to this report as rendered and no hearing is requested." You took no written exception to the report?

(The document referred to appears at p. 387.)

Mr. KLEIN. No, sir. Is that my signature, sir?

Mr. HARKINS. I thought it was yours. I will hand it to you.

Mr. KLEIN. That is Mr. Lydecker's signature, sir. It is a tough signature to read.

Mr. HARKINS. There are a few more questions that refer to the final steps of the Great American takeover that involve matters where your knowledge will be helpful.

One matter is, there was a lawsuit involved in this transaction. After your tender was announced, a lawsuit was commenced by Great American Insurance Co. against National General?

Mr. KLEIN. Correct.

Mr. HARKINS. And the complainant in this lawsuit named as the defendants National General Corp., Carter, Berlind & Weill, Inc., Kleiner, Bell & Co., Allen & Co., Eugene V. Klein, Herbert Allen, Jr., Charles Allen, Jr., Alan May, and Harold A. Lipton.

It lists six causes of action based upon alleged violations of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940, the Rules and Regulations of the SEC, and Regulation T of the Federal Reserve Board. The first cause of action involves allegedly false and misleading statements in National General's September 19, 1968 registration statement and exchange offer.

Paragraphs 45 and 46 of the complaint, in the second cause of action, state as follows: First, do you have a copy of the complaint with you?

Mr. LIPTON. I don't think I have it here.

Mr. HARKINS. I would like to have you follow this.

Mr. LIPTON. Yes; I have it now.

Mr. HARKINS. Paragraphs 45 and 46 of the complaint state:

45. Defendants NG and its President Eugene V. Klein, in order to induce the New York Stock Exchange to lift a suspension of trading in NG stock imposed throughout the day of June 11, 1968, issued a false and misleading public statement on Wednesday, June 12, 1968 (while the New York Stock Exchange was closed) that NG's acquisition of plaintiff's stock was made “as an investment" and that NG had no plans regarding possible additional stock purchases or to seek representation in the management of the plaintiff.

46. Within a day of issuing the aforementioned false and misleading statement, defendant NG's President Klein contacted plaintiff's management for an appointment the following week, June 18, 1968, at which time the defendant Klein stated that he had, in fact, purchased plaintiff's stock for the purpose of a take-over and not for investment as he had fraudulently misrepresented to the public on June 12. He stated his decision had, in fact, been made a week prior to the June 12 false, fraudulent and misleading NG statement, and that his investment statement was given as a "token compliance" with the request of the New York Stock Exchange.

(The document referred to appears at p. 388.)

Mr. Klein, did you contact a member of Great American's management on June 12 or June 13 to ask for an appointment the following week of June 18?

Mr. KLEIN. I did contact management. Whether it was June 12 or not, I am not sure. However, I would like to reply.

Mr. HARKINS. May I go through the questions I have and then you can have as much time for your reply as you wish.

During the conversation with Great American's management, did you state that National General was acquiring Great American stock for the purpose of takeover and not for investment?

Mr. KLEIN. No.

Mr. HARKINS. Did National General answer Great American's complaint?

Mr. KLEIN. Yes. I am sorry. No.

Mr. HARKINS. You may make your statement now.

Mr. KLEIN. In the well-known vernacular of business, there is a saying that "Losers litigate," which is exactly what they did, and I am sure you are aware, sir, that people can file allegations of any kind that they particularly seem to want to file, with no libel or nothing. We denied all of the allegations. The allegations are untrue. There was no impropriety. The lawsuit was subsequently dropped, period. There was no merit to the lawsuit at all.

Mr. LIPTON. I can point out one other thing, Mr. Harkins. That complaint was not verified, which is the most unusual procedure.

Mr. HARKINS. However, you have testified that on June 12 or June 13 you did contact Great American?

Mr. KLEIN. I am sure there are many things in the complaint that have a semblance of truth.

Mr. HARKINS. You did contact them?

Mr. KLEIN. Yes.

Mr. HARKINS. And this is the first contact with Great American? Mr. KLEIN. Yes.

Mr. HARKINS. Whom did you contact?

Mr. KLEIN. Mr. Newcombe.

Mr. HARKINS. What did you say to him?

Mr. KLEIN. I told Mr. Newcomb National General had been a purchaser of some 400,000 stocks of Great American and I was going to issue a press release relative to purchase of the shares, and I read them the release. I told him that I called him as a courtesy so he would not read it in the newspapers or see it on the broad tape, but after speaking with me, I then said it would be mutually advantageous for us to get together and have discussion at a future date.

Mr. HARKINS. Did you have a meeting on June 18, 1968, with Great American's management?

Mr. KLEIN. Yes. The date may-I am not sure of the date, but approximately.

Mr. HARKINS. And who from National General attended the meeting?

Mr. KLEIN. I did.

Mr. HARKINS. And no one else?

Mr. KLEIN. Nobody else from National General.

Mr. HARKINS. Who attended from Great American?

Mr. KLEIN. Mr. Newcomb, chairman of the board; Mr. Lydecker, president; Mr. Phillips, executive vice president; and Allen Comrie, senior vice president.

Mr. HARKINS. What did you gentlemen talk about?

Mr. KLEIN. I told them that we had an investment in Great American Holding Co., that we might or might not, at some future date, like to extend the investment. We were studying the situation. I talked about National General, gave them substantial information about the history of the company, what business it was in, and asked what their response would be if indeed we decided to increase our holdings in Great American Holding Co.

Mr. HARKINS. Did they answer this?

Mr. KLEIN. Yes.

Mr. HARKINS. Was the purpose of the request to make an offer to the management to see if you could negotiate a better merger?

Mr. KLEIN. No, sir.

The CHAIRMAN. Did you talk about a possible merger?

Mr. KLEIN. Yes, sir.

Mr. HARKINS. When you went to the meeting, were you hopeful that when you came out of it, you would have an understanding with the people you talked to?

Mr. KLEIN. That was not the purpose of the meeting, no.

Mr. HARKINS. What was the purpose of the meeting?

Mr. KLEIN. I told you the purpose of the meeting was to acquaint myself and National General with these gentlemen, to these gentlemen, to explain to them our position, the fact we had a large investment in Great American Holding Corp. and that we might decide to increase our investment and we might decide to effectuate or attempt to effectuate a merger. That decision had not been made, but in the event we did make a decision what would their position be, how would they look upon it

Mr. FOGT. Mr. Klein, the four gentlemen that attended the meeting are they still employed by Great American?

Mr. KLEIN. Two.

Mr. FOGT. What happened to the other two?

Mr. KLEIN. One is now president of an investment banking firm or investment house, Mr. Comrie, and one, I believe, is a vice president of Title Insurance in Los Angeles.

Mr. FOGT. Did they leave voluntarily?

Mr. KLEIN. One did.

Mr. FoGT. And one was fired?

Mr. KLEIN. Okay, one was involuntary, one was voluntary and one involuntary.

Mr. HARKINS. Ultimately you renewed the tender offer, and as a result you acquired approximately 94 percent of Great American stock in exchange for approximately $329,251,400 principal amount of 4 percent convertible debentures and 9,877,762 $40 warrants. Is that statement right?

Mr. KLEIN. No. I don't think that is right. That is not correct, I don't believe.

Mr. LIPTON. Where are you reading from?

Mr. HARKINS. The National General registration statement, dated February 14, 1969, and the June 24, 1969, interim report. I had to do some computations. Perhaps you can supplement the record and tell exactly.

(Subsequently, National General furnished the information, which appears at p. 413.)

Mr. KLEIN. Yes, and I think the amount of bonds is incorrect. I don't believe there is $329 million. There was a little under $250 million worth of bonds as I recall, but we will supply the correct figures. Mr. HARKINS. All right.

The exchange offer was a $50, 4 percent subordinated, convertible debenture and 12 $40 common stock purchase warrants. That was the exchange for each share of Great American?

Mr. KLEIN. Yes.

Mr. HARKINS. That was the package. The market value on October 31, 1968, during the course of the exchange offer by National General, was $99 for the convertible debenture and $33 for the 12 warrants making a total of $132 for the package?

Mr. KLEIN. No, sir.

Mr. HARKINS. What was the total value of the package?

Mr. KLEIN. You are speaking of $99 for the debentures and that means the debentures were selling for approximately par, 99 or 100, but it was a $50 debenture, not $100 debenture, so the value of the debenture was approximately $50 and value of warrants were approximately 30, 32, or 33. You had an $80 to $83 market value at that time.

Mr. HARKINS. What is the market value of that package today? Mr. KLEIN. I would estimate 23 for the debenture and about $31 would be it.

Mr. HARKINS. It has declined from 83 to 31 since that time?
Mr. KLEIN. That is correct.

Mr. HARKINS. In the report of Mr. Netter, he listed 10 companies which would be suitable for takeover or rather had surplus surplus. At the present time, I believe only two such companies are still independent, St. Paul Fire & Marine, and U.S. Fidelity & Guaranty Co. In regard to the stock of these companies which have remained independent their common stock prices have increased in the period from 1968 to the present as follows:

St. Paul Fire & Marine was 32 bid, and is now 42 bid; and U.S. Fidelity & Guaranty Company went from 56% to 68%.

Can you draw a conclusion from this that the insurance companies that were not taken over by holding companies are better off, are faring better?

Mr. KLEIN. What was the price of Great American Holding there? Mr. HARKINS. I don't have the price of that.

Mr. KLEIN. It should be in the record. I believe the price of Great American at the beginning of 1968 was $22 a share, sir. The records of the New York Stock Exchange will verify the exact price.

Mr. FOGT. I think the price was quoted as of June, when the price, according to the testimony, was up around 40.

Mr. HARKINS. The stock of Great American Holding Co., June 25, 1968, was selling at 58, or rather, 56%.

Mr. KLEIN. Somewhere in the early part of 1968, Great American Holding was selling in the low or middle low twenties.

Mr. HARKINS. But at the time your tender offer became effective, it was 68%.

Mr. KLEIN. Of course, because people knew they were going to get substantially more for it. That is obvious.

The CHAIRMAN. We are talking about the time Mr. Netter submitted the report concerning the 10 insurance companies. Eight of them have been taken over and two of them have remained independent. We are making the comparison as to the value of the stock of the independent companies' on June 28, 1968, and the value of their stock on January 25, 1970. The St. Paul Fire & Marine stock on June 28, 1968, was 32 bid and on the later date it was 42 bid. The other stock, United States Fidelity & Guaranty Co., was 68% bid on January 26, 1970. They didn't do badly.

Mr. KLEIN. May I make an analogy? If we could have the same reference date, the package as of January 4, 1969, the national package was worth $75 a share.

The CHAIRMAN. In the market?

Mr. KLEIN. In the market, sir.

Mr. HARKINS. Great American on June 25, 1968, was 561-this was 2 days before your tender offer announcement, and in January you said it was 20?

Mr. KLEIN. Sixty-eight, yes.

Mr. HARKINS. Between January and June of 1968, it moved before the tender offer from 20 to 6834?

Mr. KLEIN. All of the insurance companies stock dropped on the possible takeovers. That is correct. The entire industry moved up as all of the investors rushed in to buy, feeling there will be mergers with other companies and the values will depreciate.

The CHAIRMAN. It was a far thing from what they are today.

Mr. KLEIN. I would not like to accept blame for the present condition of the stock market, sir.

The CHAIRMAN. Well, despite the present bad conditions in the stock market, the stocks of these two independent companies have held up very well.

Mr. KLEIN. That is as of January 1.

The CHAIRMAN. January 26, 1970.

Mr. KLEIN. Oh.

The CHAIRMAN. This is this year, 1970; they are holding up very well.

Mr. KLEIN. So it goes.

The CHAIRMAN. On that date $42 was the market price for St. Paul Fire & Marine stock, and U.S. Fidelity & Guaranty stock was $68%. That will end the testimony this morning. We want to thank Mr. Klein and the other witnesses.

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