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count with Wayne Hummer & Company, 1,000 shares of Allegheny Corporation Preferred Stock and $81,000 Central of Georgia Railway Company 5% Series C Bonds due April 1, 1959. These securities were used to collateralize the loan. Additional Central of Georgia Railway 5% 1959 bonds purchased through his Wayne Hummer & Company trading account were pledged by Senator McCarthy to the bank. Senator McCarthy also received $15,960.98 from Wayne Hummer & Company on July 11, 1945, which was used to purchase $69,000 Central of Georgia Railway Company 5% Series C bonds due April 1, 1959, as additional collateral against his Appleton State Bank indebtedness of $75,000. This $15,960.98 included approximately $11,000 transferred from Senator McCarthy's account with Dean Witter & Company plus realized profits of $3,700 in his Wayne Hummer trading account. The account with the Dean Witter Company showed a total realized profit of $172.78.

Up to and including December 21, 1945, Senator McCarthy's indebtedness to the Appleton State Bank had been reduced to $20,364.64, largely from the proceeds of the sale of collateral, but including $9,959.23 from an undetermined source. On that date, Senator McCarthy received a loan of $149,176.06 from the Appleton State Bank. These funds were used to purchase, through the omnibus account of the bank with Wayne Hummer & Company, 5,000 shares of Chicago, Milwaukee, St. Paul and Pacific Railroad Company common stock, which stock was pledged against the indebtedness (Exhibit 92). This loan increased Senator McCarthy's indebtedness to $169,540.70, which was $69,540.70 in excess of the bank's statutory loan limitation. The appearance of compliance with statutory requirements was created by transferring, on December 26, 1945, $69,540 to a loan ledger sheet in the name of H. F. McCarthy, a brother of Joseph R. McCarthy. Securities to collateralize the transferred balance of $69,540 (2,650 shares of Chicago, Milwaukee, St. Paul & Pacific Railroad Company common stock) owned by Senator McCarthy were transferred (Exhibit 93. In April and May, 1946, proceeds from the sale of 2,400 shares of this stock sold through the omnibus account of the Appleton State Bank, plus $5,562.54 from an undetermined source, liquidated this fictitious H. F. McCarthy loan.

As of early in 1946, the total indebtedness of Senator McCarthy to the bank, including the H. F. McCarthy portion, aggregated $170,029.03. During 1946, funds totalling $116,173.69 were applied against the loan reducing it to $53,855.34. Of this reduction, a total of $73,127.96 represented principally proceeds from the sale of collateral; $28,401.06 which could not be traced to any known bank or brokerage account, including reductions of $16,675.65 in July and August, 1946; and $14,644.66 representing funds loaned Senator McCarthy through friends of the president of the bank. Subsequently, in January of 1948, an additional loan of $20,000 was made to Senator McCarthy and up to and including August 1, 1951, Senator McCarthy's indebtedness to the Appleton State Bank was reduced by $28,855.34 (net), representing principally proceeds from the sale of stock, thus reducing the balance of the loan account to $45,000. This August 1, 1951, balance of $45,000 was liquidated on September 14, 1951, by the sale of collateral.

The overall picture of Senator McCarthy's loan at the Appleton State Bank (Exhibits 91 and 91A) shows he was loaned a total of

approximately $248,000 during the period February 13, 1945, to September 14, 1951. Exclusive of the $20,000, the major part of this $248,000, a sum aggregating $226,000, was loaned in 1945. The largest outstanding balance at any time was $170,000. The borrowed funds were used for speculation in securities and the collateral, for the greater part, consisted of securities purchased with the borrowed funds. The loans were liquidated as follows:

Proceeds of collateral sold and income from dividends_.

Funds from Timothy McCarthy

Funds from F. J. Sensenbrenner_
Untraced funds___

Checks from Senator McCarthy.

$190, 116.96 2,000.00 14, 644. 66 39,900. 89

1,242. 43

$247, 904.94

Untraced funds totalling $39,900.89 could not be traced to proceeds of securities sold, dividends, or bank accounts of Senator McCarthy. Of this untraced total, $28,401.06 was credited to Senator McCarthy's indebtedness in 1946, a year during which his security speculations resulted in a net realized loss of in excess of $10,000, and a year in which he won the Republican nomination for United States Senator. This $39,900 included round amount credits of $5,000, $9,000, $1,000, $2,500, $1,500, and $3,500.

With further reference to the loan of $20,000 by the Appleton State Bank to Senator McCarthy early in January 1948, it should be noted that the loan was made against a $20,000 note of Senator McCarthy endorsed by Russell M. Arundel, a Washington representative of the Pepsi-Cola Corporation.

In the latter part of 1947, Matt Schuh, the President of the Appleton State Bank and apparently a close friend of Senator McCarthy, prodded by his Board of Directors and probably by the State Banking Department, urged upon Senator McCarthy the immediate necessity of reducing his indebtedness to the bank by $15,000 or $20,000. After several communications back and forth between Mr. Schuh and Senator McCarthy, the bank loaned the Senator $20,000 on January 3, 1948. The borrowed funds were used to purchase 600 shares of Chicago, Milwaukee, St. Paul & Pacific Railroad preferred stock. This increase in an already hazardous loan was directly contrary to the expressed wishes of the Board of Directors of the bank (Exhibit_94), whose position was probably influenced by Examiners of the State Banking Department and possibly the FDIC. This $20,000 loan was reduced to $6,553.04 by the sale of collateral stock for $12,446.96 and the application on January 3, 1949, of $1,000 of a $1,500 Seaboard Airlines Railroad common stock dividend. On January 5, 1949, the balance of $6,553.04 was charged off upon instructions of the State Banking Department (Exhibit 95). During 1949, Senator McCarthy paid a total of $1,242.43 against this charged off balance and on November 27, 1950, the then balance of $5,310.61 was recharged to Senator McCarthy's loan account. At no time was any attempt made to collect on this note from the endorser, Russell M. Arundel. The Arundel situation is commented upon more fully elsewhere in this report.

Of particular interest indicating further the lengths to which Mr. Schuh, President of the Appleton State Bank, went in respect to Senator McCarthy's loan, is an arrangement made in April 1947, regarding interest payments on Senator McCarthy's note. This op

eration, elsewhere referred to in this report, permitted Senator McCarthy to pay the interest due in cash, but to have the cash applied to the loan principal and set up interest notes in the amount of the interest paid.

As of early November 1948, the indebtedness of Senator McCarthy to the Appleton State Bank was $72,000. He had sustained net realized loss in the stock market of $28,000 in 1947 and $35,000 in 1948. As of November 22, 23, 24, 25, and 26, 1948, his checking account at the Riggs National Bank, Washington, D. C., was overdrawn. The Appleton State Bank was demanding that he do something about the Arundel note and suggested that they use the $10,000 savings account of Ray Kiermas, an employee in Senator McCarthy's office, to reduce the overdue $20,000 Arundel note (Exhibit 96). This savings account of Ray Kiermas was at this time standby collateral for Senator McCarthy's loan. This figure of $10,000 is to be noted as on November 12, 1948, Senator McCarthy received the $10,000 fee from Lustron Corporation which was used, not to reduce his Appleton State Bank indebtedness, but to purchase 450 shares of Seaboard Airlines Railroad common stock, which was delivered to the Appleton State Bank as much needed collateral for the loan.

That this $10,000 Lustron fee was a very limited, temporary solution of the loan collateral situation is indicated by early 1949 letters between the Appleton State Bank and Senator McCarthy (Exhibit 97). In response to urgent requests for more collateral $10,000 was transferred from a commodity trading account at Daniel F. Rice & Company, Chicago, Ill., in the name of William P. McCarthy, a brother of Senator McCarthy, through the Continental Illinois National Bank of Chicago, on February 10, 1949, to the Appleton State Bank and was used to acquire additional collateral. This transaction is set forth in greater detail elsewhere in this report. In late December 1950, 48312 shares of Dana Corporation stock were sold and the proceeds amounting to $6,905.19 were applied against the loan. On January 25, 1950, an additional 350 shares were sold and the proceeds, amounting to $4,796.32 were conveyed to the Appleton State Bank by Wayne Hummer & Company as part of their check No. 13,561-B, dated January 25, 1950, to the order of Appleton State Bank, in the amount of $5,889.79. On January 26, 1950, the Appleton State Bank delivered their Demand Certificate of Deposit No. 100,611 to Ray Kiermas in the amount of $5,889.79, representing the proceeds of the sale of the Dana Company stock amounting to $4,796.32 and the proceeds of the sale of 50 shares of Senator McCarthy's holdings of Seaboard Airlines Railroad common stock amounting to $1,093.47. This Certificate of Deposit was deposited by Kiermas in his Appleton State Bank savings account on September 7, 1950, seven months later.

This $10,000 from Daniel F. Rice & Company provided no solution to the margin situation as evidenced by letters between the Appleton State Bank and Senator McCarthy from June 2, 1949, to May 2, 1950 (Exhibit 98). After May, 1950, the pressure in respect to sufficient collateral for the loan appears to have lessened due to appreciation in pledged Seaboard Airlines Railroad stock and substantial collateralization of the loan by assets of Ray Kiermas. As of September 14, 1951, the indebtedness of Senator McCarthy to the Appleton State Bank aggregated $45,000, and was liquidated on that date by a por

tion of the proceeds of the sale of 1,000 shares of Seaboard Airlines Railroad Company stock (Exhibit 99).

On January 28, 1952, the Appleton State Bank loaned Senator McCarthy $12,000 which sum was in turn given to H. F. McCarthy in the form of an Appleton State Bank Demand Certificate of Deposit issued to him in the amount of $12,000 on January 28, 1952.

Exhibit 100 sets forth particulars of assets of Ray Kiermas used to collateralize the Appleton State Bank loan of Senator McCarthy. Comments regarding the Kiermas situation, particularly the acceptance of the pledge of Ray Kiermas' savings account by his employer in 1947 and the pledge of the $5,000 mortgage about the time of the 1946 election are made elsewhere in this report.

Appleton State Bank interest manipulation

Under date of April 15, 1947 (Exhibit 105), Senator McCarthy first broached the plan to pay the interest due on his notes but apply the payments to the principal and set up interest notes for the interest paid. Subsequently, when most advantageous to Senator McCarthy, and at his discretion, the interest note was to be paid and the payment taken as a tax deduction against income. Senator McCarthy's letter dated July 12, 1947, to Matt Schuh, President of the Appleton State Bank (Exhibit 106), again stresses the income tax feature. Under date of September 2, 1947, (Exhibit 107) Mr. Schuh specifically asked for a check for $477.00 interest and, in compliance with a subsequent telephone conversation on September 9, 1947, Ray Kiermas forwarded Senator McCarthy's check for $500 to the bank (Exhibit 108). Letters dated October 16, 1947, April 5, 1948, and April 16, 1948, further explain the operation. In 1949, Senator McCarthy elected to use interest paid in this manner totalling $6,810.28 as a deduction against income on his state and federal income tax returns. In 1946, 1947, and 1948, deductions of this $6,810.28 were not needed to establish a loss in respect to his Wisconsin income tax returns, as filed, because losses on security transactions operated to eliminate taxable income. In connection with Senator McCarthy's 1949 Wisconsin state income tax return, as filed, he listed loss on security transactions of only $2,290 against gross income of $17,120. An interest deduction of $15,172.54, of which this $6,810.28 was a material part, operated to eliminate taxable income for that year.

On Senator McCarthy's 1949 Federal Income Tax Return, this $6,810.28 deduction furnished a substantial offset to the $10,000 Lustron fee, which was received in 1948 but reported as income on his 1949 Federal return. It might be observed that Senator McCarthy reported this $10,000 as 1948 income on his Wisconsin tax return for that year upon instructions from J. L. Tibbetts, Assessor of Incomes, in answer to an inquiry from Senator McCarthy.

The Wisconsin Department of Taxation, after investigation, disallowed this 1949 deduction of $6,810.28 on the basis that "this interest was actually paid in cash in the years 1946 and 1947" (Exhibit 110). The Bureau of Internal Revenue, after investigation, also disallowed this 1949 interest deduction of $6,810.28 as per their audit report dated June 11, 1951, on the basis of a "schedule supplied them over the signature of the President of the bank, M. A. Schuh, which schedule reflects individual items of interest as actually received by the bank." The transfer of the $10,000 Lustron fee from

1949 income, as reported by Senator McCarthy, to 1948 income and the disallowance of the $6,810.28 interest deducted in 1949 were the major items upon which an additional tax of $3,975.15 was levied by the Bureau of Internal Revenue in respect to 1948 and 1949 income. Senator McCarthy's and Ray Kiermas' bank accounts

From January 1, 1948, to November 12, 1952, Senator McCarthy deposited a total of $172,623.18 in his account at the Riggs National Bank, Washington, D. C., and during the same period, Ray Kiermas deposited a total of $96,921.26 (Exhibit 102). The figure, in respect to Senator McCarthy's deposits, does not include $10,000 received from Lustron Corporation in 1948, nor the $10,000 withdrawn from the account at Daniel F. Rice & Company, Chicago, in the name of William P. McCarthy in 1949, which transaction is set forth in detail elsewhere in this report. These two amounts went to Wayne Hummer & Company, Chicago, and were used to purchase securities which were pledged as collateral for the Appleton State Bank loan to Senator McCarthy. Also, it does not include approximately $15,000 in dividends received on securities owned by Senator McCarthy, which dividends were applied to reduce his indebtedness to the Appleton State Bank.

Investigation revealed only two checks from brokerage_houses ($5,449.55) included in the above $172,623.18 deposit figure. It does, however, include approximately $8,600 representing loans from banks and loan companies. There were no transfers of appreciable amounts from other bank accounts in the name of Senator McCarthy.

The total deposit figure of $96,921.26 in respect to Ray Kiermas includes approximately $13,000 representing checks from brokerage accounts and transfers from his other accounts deposited in 1951, and a check from a broker and a transfer of funds totalling $2,934.55 deposited in 1952.

It is to be noted that of the $172,623.18 deposited by Senator McCarthy a total of $59,592.52 has not been identified as to source, including approximately $19,000 in currency deposited. In respect to the $96,921.26 deposited by Ray Kiermas, a total of $44,908.43 has not been traced to its source, including $29,230 deposited in currency (Exhibit 103).

Comparison of the total funds deposited by Ray Kiermas in 1950, 1951, and 1952, as against funds deposited by him in 1948 and 1949, disclosed a substantial increase in respect to the three last years. This increase is appreciable, particularly as regard 1950 and 1952, even after deducting the funds representing brokers' checks and transfers mentioned above. To be noted is, that of the $96,921.26 deposited by Ray Kiermas from 1948 through 1952, a total of $29,230 (30% of the total deposited) represented currency deposits, and of this $29,230, approximately $21,000 represented individual deposits in excess of $300 each, and 12 individual deposits ranging in amounts from $700 to $2,405 accounted for $14,000 of this $21,000.

Substantial funds were passed to and from Senator McCarthy and Ray Kiermas. From March, 1947 to May, 1952, $16,386.22 passed from Ray Kiermas to Senator McCarthy, including $1,400 identified on the deposit slip as "Art Kiermas", and $13,647.92 from Senator McCarthy to Ray Kiermas (Exhibit 104).

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