"That the present bond issue be renewed or extended in a manner whereby the banks will receive their $200,000 holding in this bond issue only from performance of the contract on the five C-1 boats, and that the present R. F. C. second mortgage be extended and secured by a lien subordinate to the contingent liability of the surety company, the $400,000 new loan by the R. F. C., and the total of the present bond issue of $1,168,000;

"That the $200,000 bank portion of the bond issue and the $300,000 third mortgage to the R. F. C. shall be paid on a pro rata basis as boats are delivered under the C-1 contracts, substantially according to the same terms and conditions as now apply in connection with the C-2 contracts; and

"That the above arrangements are contingent upon the company securing from the Maritime Commission satisfactory contracts covering five C-1 vessels and effecting satisfactory ararngements with the steel suppliers, and the engine subcontractors to furnish $100,000 of working capital each, and such other agreements as may be required by the Maritime Commisison, banks, and all interested parties in order to effect the above security position as to the various notes and bond issues, and related repayment program.

"It is proposed that the new $400,000 mature on November 1, 1940, but it is understood that the R. F. C. would be agreeable to a date about 60 days later, which would cause much maturities to begin sometime after the contractual delivery date of the first of the vessels under the new contracts. It is the desire of the R. F. C. that the first moneys available for debt retirement be applied to the new loan and, in particular, that if any cash profits are derived from the present C-2 contracts they be applied to the new loan if that can be done without depletion of working funds.

"Under this plan the order of security would be as follows:

"(1) Subordination to surety company to the extent of $500,000.

"(2) New $400,000 first-mortgage loan.

"(3) Present first-mortgage loan, which becomes a second-mortgage loan. It is under this loan that the two local banks hold $100,000 of bonds each.

"(4) Present second-mortgage loan, which becomes a third-mortgage loan. This item is the $300,000 which was advanced by the R. F. C. at the time of the C-2 contracts and as to which the Commission may be liable as guarantor. A further loan made this spring of $35,000 to the company for tools for the drydock is understood to be secured by this junior mortgage, but is not guaranteed by the Commission.

"(5) Unsecured bank loans.

"Experience, therefore, of the contractor operating under the present contracts and with presently available funds appears to offer acceptable evidence that the proposed financial arrangements are a reasonable provision for performance of the pending C-1 contracts."

Thereafter on September 20, 1939, the committee on awards of the Commission, whose members were Messrs. H. L. Vickery, R. E. Anderson, and Ralph K. Chase, addressed a memorandum to the Commission as follows:

"Your committee on awards has reviewed the bid of the Tampa Shipbuilding & Engineering Co., the lowest bidder for construction of C-2 geared Diesel vessels. "The company has submitted a letter attached to its C-2 bid in which it states that it has a capacity to undertake construction of only four vessels of C-2 class or five vessels of the C-1 class at the present time.

"The additional financing that this company has arranged for carrying on construction of five C-1 vessels is equally sufficient for construction of four C-2 vessels.

"This committee believes that it will be more advantageous from the Government's standpoint, both financially and economically, to contract with this company for construction of four C-2 vessels, duplicates of their present vessels under contract, than have this company construct a new design, namely, C-1.

"This committee believes that, subject to final confirmation of proposed financial arrangements, the Tampa Shipbuilding & Engineering Co. possesses the ability, experience, financial resources, equipment, and other qualifications necessary to perform the proposed contract.

"This committee suggests that the same conditions of award C-1 Tampa contract be made applicable to the presently recommended award of C-2 contracts.

"RECOMMENDATION

"1. The committee on awards recommends that the action of the Commission of August 8, 1939, awarding a contract for five C-1-B vessels to Tampa Ship

building & Engineering Co. be rescinded as not in the best interest of the Government and their bid for C-1 vessels be rejected.

"2. The Tampa Shipbuilding & Engineering Co. be awarded a contract for four C-2 vessels, geared Diesel drive, duplicates of vessels presently under construction, on adjusted price basis of $1,950,000, contingent upon the working out of the financial arrangements substantially as outlined in the memorandum of the Director of Finance which accompanied the committee's recommendation on the C-1 bid, and the proposed voting-trust arrangement to the satisfaction of the Director of Finance, and subject to legal clearance."

Under date of October 19, 1939, the Director of Finance of the Commission addressed a memorandum to the Commission, as follows:

"In connection with the recommendation of the committee on awards dated August 7, 1939, with respect to contracts for five C-1 vessels which the Commission awarded to the Tampa Shipbuilding & Engineering Co. which award was later replaced by the award to that company for contracts for four C-2 vessels, the Director of Finance outlined in memorandum dated August 4, 1939, the plan for the Reconstruction Finance Corporation's loan.

"As a result of discussions which have been had by the shipbuilding company with the surety companies and with the Reconstruction Finance Corporation, modification of the financial plan has been worked out; the principal changes being that

"(a) Instead of a loan of $400,000 by the Reconstruction Finance Corporation and the subordination to the surety companies to the extent of $500,000, the Reconstruction Finance Corporation will make a loan of $900,000, of which $400,000 will be available at once and the balance will be held as an available line. This new loan to be secured by mortgage and together with the $35,000 loan made for drydock tools, etc., to have priority over the old $300,000 secondmortgage loan.

"(b) Fixed maturities have been arranged instead of having dates based upon performance under the existing contracts for the first four C-2 vessels. This change in maturity arrangements was requested by the sureties in order to protect the working capital.

In more detail the present plan is as follows:

"1. The Reconstruction Finance Corporation will authorize the new loan of $900.000 to mature January 1, 1942.

"2. Four hundred thousand dollars of this loan to be disbursed immediately; $250,000 of the $400,000 to be used for plant improvements and $150,000 for working capital; the remaining $500.000 to be disbursed as needed for working capital on request of trustee bank and Maritime Commission.

"3. Loan to be secured by first mortgage on all of borrower's fixed assets as now pledged as security for $1,168,000 principal amount of borrower's so-called first-mortgage 5 percent serial bonds, and the mortgage securing these bonds is to be of equal rank as to the security for this loan.

"(a) The $200,000 portion of the first-mortgage bonds held by the Tampa banks will be extended so as to come due January 1, 1942; other maturities of this first-mortgage bond issue to remain unchanged.

"(b) The $35,000 note will be secured by a lien second only to the lien securing the new loan of $900,000 and the first-mortgage bonds of $1,168,000; the maturity of this loan not to be changed.

"(c) The $300,000 loan now secured by a second mortgage to be secured by a mortgage subordinate to loans referred to in (a) and (b) above, totaling $2,103,000, and is to mature January 1, 1942.

"(It is understood that any portion of the new loan which is disbursed, while it has the same security as the present bonded debt, is to be repaid prior to any repayment of the $200.000 portion of the bonded debt belonging to the banks and the $300,000 third-mortgage loan.)

"4. That company furnishing the engines and the companies furnishing steel leave on deposit with borrower 20 and 25 percent, respectively, of invoices until each has on deposit $100,000, or that each of such creditors continue and maintain $100,000, which is now being used by borrower in their working capital. Each such creditor shall be permitted to collect 25 percent of the $100.000 left with borrower 30 days after the acceptance by the United States Maritime Commission of each boat to be built under the second contract awarded by the Martime Commission to the borrower. "5. The loan to be guaranteed by Ernest Kreher.

"6. Management should be satisfactory to this Corporation and the Maritime Commission.

"7. An agreement with Exchange National Bank of Tampa (trustee bank) to handle proceeds of this loan and all funds received from the Maritime Commission on account of their contract with the borrower in substantially the same manner as they are now handling first contract between Maritime Commission and borrower.

"Item 3 (b) is the loan of $35,000 made this spring to the company for tools for the drydock.

“Item 3 (c) above is the $300,000 which was advanced by the Reconstruction Finance Corporation at the time of the C-2 contracts and as to which the Commission may be liable as guarantor. It is understood that the Reconstruction Finance Corporation, therefore, desires the consent of the Commission to the above plan.

"This entire revised arrangement appears to be distinctly more favorable than the previous arrangement outlined in the memorandum accompanying the recommendation of the committee on awards.

"Recommendation.-It is recommended that the Commission authorize its proper officers to give appropriate consent to the plan for financing the C-2 contracts recently awarded to the Tampa Shipbuilding & Engineering Co. substantially in accordance with the above outline insofar as relates to matters with which the Commission is concerned, and to take such other action as may be necessary to carry out the plan."

Despite the fact that the files are replete with data tending to show that the company could not perform its contracts, and that it was insolvent and would sustain heavy losses, the Commission, by contracts dated October 25, 1939 (but actually executed on November 27, 1939), agreed with the old company for the construction of 4 additional C-2 cargo vessels at, and for a price of, $1,950,000 each, or a total of $7,800,000, progress payments to be made thereunder on the basis of 95 percent of the work and materials currently accomplished and furnished. Performance of the contracts of October 25, 1939, was secured by bonds executed by 27 of the leading surety companies doing business in the United States.

ORGANIZATION AND FINANCIAL POSITION OF TAMPA SHIPBUILDING CO., INC.

On November 7, 1940, Tampa Shipbuilding Co., Inc., was organized under the laws of Florida for the purpose of taking over the property and assets and assuming the liabilities of the old company, including the completion of the last three of the first four C-2 cargo vessels and the construction of the second group of four C-2 cargo vessels. The new company was authorized to issue 10,000 shares of no-par-capital stock, consisting of 3,400 shares of class A nonvoting and 6,600 shares of class B voting stock. The charter of the new company was prepared by the General Counsel of the Maritime Commission and transmitted to the United States attorney, Tampa, Fla., for approval and filing with the secretary of State for Florida. The United States attorney, in his private professional capacity, had theretofore represented the old company, and he thereafter became attorney for, and represented, the new company in the transactions herein mentioned and discussed. He received a fee of $1,000 for his participation in the organization of the new company, including the preparation of its new charter; and his fee was paid with the approval of the R. F. C.

Mr. George B. Howell, president of the new company, who proposed the reorganization, for a consideration of $500, acquired and now owns all the stcok of that company. He has stated that it is intended that the nonvoting stock of the company will be divided between the officers, directors, and stockholders of the old company on the basis of two shares of the old company for one share of the new company. No record of any such agreement has been found, either in the files of the new or the old company, the Commission, or the R. F. C. There is, however, in the files of the last-mentioned agency a letter from Ernest Kreher, president and principal stockholder of the old company, addressed to Mr. Emil Schram, of the R. F. C., to the effect that George B. Howell had informed him that the nonvoting stock of the new company would be divided between the stockholders of the old company; but he quoted Howell as relating a somewhat different method for the intended division.

Officials of the Commission have stated, and its records and files, as well as those of R. F. C., show, that it was necessary to effect a complete change in the

company's management, due to the alleged fact that while Ernest Kreher and his associates were competent shipbuilders they were incapable of handling efficiently the company's affairs pertaining to business and finances. As a means of effecting such change, it was decided to organize the new company in the manner and for the purposes herein set forth.

A letter found in the files of R. F. C., to Mr. Emil Schram, further reflects that Mr. Kreher appealed to Mr. Schram to resist the proposed elimination of him and his family from a business they had established and operated for some 40 years; but his appeal was accorded no response.

As matters now stand, George B. Howell, sole owner of the entire stock of the new company, representing a claimed surplus of $2,896,430.29, as of January 31, 1942 exclusive of a reserve of $483,779.19 for refunds on Government contracts), is in complete control and he may, and probably will, reap all benefits appertaining to his position. Mr. Howell claims to have been granted a 5-year leave of absence from his duties at Exchange National Bank of Tampa to enable him, at a salary of $25,000 a year, to manage the business and affairs of the new company.

SALES OF SHIP HULLS TO THE NAVY DEPARTMENT

On November 14, 1940, the Commission indulged a fictional sale to the new company of the last three of the first group of four vessels (the first vessel of said group having been completed and delivered to the Commission) for the amount of progress payments alleged to have been made as of that date to the old company, amounting to $4,613,247.67. Said sale was consummated upon, and contemporaneously with, a written admission by the old company that it would not complete its said contracts. On the same date the new company sold the same three uncompleted hulls to the Navy Department for $2,180,000 each, or a total of $6,540,000, representing the supposed or arbitrary value of said hulls completed. This, in effect, increased the lump-sum price to the extent of $376,469.26 for each hull, or a total increase of $1,129,407.78 (based on adjusted contract prices) for the three uncompleted vessels of the first group of four sold to the Navy Department.

The plan under which the transactions were consummated is outlined in letter dated October 31, 1940, from the Chairman of the Commission to the Secretary of the Navy, as follows:

"I refer to your letter of October 3, 1940, and to my reply dated October 22, 1940, with respect to the acquisition by the Navy of the vessels Shooting Star, Surprise, and Sweepstakes, now building at the Tampa shipyard. As indicated in such correspondence, the Commission is in agreement that these vessels should be made available to the Navy. Due, however, to the situation existing at the Tampa shipyard, whereby the present contractor appears to be unable through financial and other difficulties to complete the vessels, it has become necessary to carry out a plan of reorganization in order that the completion of the vessels may be accomplished without incurring substantial delay in their delivery. The Commission on October 30, 1940, approved in principle a plan for the reorganization of the yard whereby operations would be carried on by a new company, Tampa Shipbuilding Co., Inc. Because of the problems involved, the following general procedure with respect to the completion of the three vessels named above appears to us to be necessary:

"1. The Commission will default the existing contracts with the present builder for the construction of these three vessels;

"2. Under the default provisions of the existing contracts, the Commission will sell the uncompleted hulls to the new company for the amount which the Commission has already paid out for these hulls;

"3. The new company will forthwith enter into a contract or contracts with the Navy Department, whereby the Navy acquires these uncompleted hulls and the new company agrees to deliver completed vessels, free and clear of liens and claims, for $2,180,000 each;

"4. The Navy Department will furnish the Commission on or before the date of signing of the new contracts with funds to the extent of $2,180,000 for each vessel, out of which the Commission will (a) reimburse itself for the amounts which it has already paid out on account of the construction of the three vessels; and (b) disburse the balance for the account of the Navy to the new company by way of progress payments which will become due under the new contracts;

"5. It is understood in this connection that the Commission will, as agent for the Navy Department, take care of the proper disbursement of the funds and will also continue the inspection and supervision of the construction work.

"The Commission, in accordance with conversations yesterday with representatives of the Navy Department, is preparing the necessary contract forms which will be submitted to the Navy Department within the next few days. In view of the fact that immediate action is necessary in this situation I hope that the foregoing program can be consummated with all possible dispatch."

In report dated August 31, 1940, the Commission's auditors estimated the cost to complete hulls 33, 34, 35, and 36, as follows:

The records disclose that fees aggregating $226,301.52 were paid by the Commission to George G. Sharp for the preparation of plans for the eight hulls, 33 to 40, inclusive, C-2 vessels built at the Tampa yard, and that the amount of $28,287.70 (representing one-eighth of the $226,300.52) was included in the price of the vessel (hull No. 33) sold to United States Lines Co.

It appears that the balance of the architect's fees amounting to $198,013.83 ($226,301.52 less $28,287.70 charged to United States Lines Co.) is included in the price of $2,180,000 paid by the Navy Department for each of hulls 34 to 36, inclusive. However, the Navy Department payments were made to the new company and no part of the $198,013.83, representing architect's fees applicable to hulls 34 to 40, inclusive, has been repaid to the Commission.

With reference to the purported sale of uncompleted hulls 34, 35, and 36, and contracts for the construction of four vessels, designated as hulls 37, 38, 39, and 40, the Director of Finance of the Commission, under date of September 25, 1940, addressed a memorandum to the Chairman of the Commission, as follows:

"Attached memoranda are for your convenience when discussing Tampa matter with the Navy.

"The average cost to the Commission for the six Federal C-2's, including extra work done at Atlantic basin, is $2,120,775.

"If,. to avoid argument, you think it wise to use that figure instead of $2,180,000, it has the advantage of a firm basis in the Federal group of ships.

"However, the Tampa ships were built to higher specifications, and also the Diesel engines would account for a substantial difference in price. This supports the fairness of my suggested figure of $2,180,000."

There was found in the files a memorandum dated November 7, 1940, over the signature of the said Director of Finance, as follows:

"This memorandum has been prepared for the information of the sureties who are considering giving performance and payment bonds to the Navy Department relating to the completion of three vessels, known as contractors' hulls Nos. 34, 35, and 36. These vessels are now under construction by Tampa Shipbuilding & Engineering Co.

"It is contemplated by the Government that the uncompleted hulls be acquired by a new company-Tampa Shipbuilding Co., Inc. Contract is to be entered into between the Secretary of the Navy and the new company for the acquisition and completion of these vessels.

"Due to the fact that time does not permit the usual investigation into such matters, either by the Maritime Commission or the sureties, it has been considered desirable that salient features be put in memorandum form. In the preparation of this beborandum it has been necessary for me to obtain unaudited figures from the present shipyard company and to use other information obtained from the files of the Maritime Commission and from conferences with officials of the old company and of the Navy Department, which although believed by me to be accurate, cannot in any sense be guaranteed.