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  Eagle on the Street

  The SEC and Wall Street during the Reagan Years

  David A. Vise and Steve Coll

  To Lori and Susan

  Contents

  1 A Great New Beginning

  2 The Man from Wall Street

  3 A Giant of the Opera

  4 Closed Meeting

  5 The Hunted

  6 Trick or Treat

  7 The Chicago School

  8 High Yield, High Risk

  9 Naked Options

  10 The Leveraging of America

  11 Leaking

  12 Dr Pepper

  13 Confrontation

  14 Testing a Friendship

  15 A Tale of Two Buildings

  16 The Manipulation

  17 A Big Fish

  18 The Fall

  19 A Generation of Giants

  20 A Form of Service

  Epilogue

  A Note on Sources

  Index

  Acknowledgments

  About the Authors

  1

  A Great New Beginning

  On that last day, May 14, 1981, Stanley Sporkin wanted to avoid all the “sentimental junk,” as he called it, so he worked straight through, hard and fast. After almost twenty years at the Securities and Exchange Commission, there was no easy way for him to go. How could there be, after all they had done together, all that history? They had built the toughest, most creative law enforcement machine in the country, Sporkin thought, a machine nobody could ever duplicate. And now he was leaving it behind.

  There would be a going-away party later, and that seemed the right time to reminisce and toast and joke. Until then, it seemed to Sporkin that there was still so much to worry about. There were two big, controversial enforcement cases on his desk that day, one involving giant Mobil Oil Corporation, the other involving Citicorp, New York’s biggest bank. Sporkin wanted to talk with David Doherty, one of his key deputies, about how to handle them when he was gone. That evening, he was scheduled to have dinner with some longtime colleagues from the SEC and with John Shad, the Wall Street financier picked by President Reagan to be the new SEC chairman.

  And there were the files—boxes, folders, and discarded papers all over his office. It was a big corner room on the fourth floor of the SEC’s Washington headquarters, with a view of the Capitol. The room had all the amenities decreed appropriate for a bureaucrat of Stanley Sporkin’s rank: carpeting, a couch, a rectangular table for meetings, and a desk. The office was large but somewhat disheveled, like Sporkin himself. There were records about past SEC investigations—corporate bribery cases from the 1970s, bank fraud probes, embezzlement cases, investigations of Wall Street. Ira Pearce, one of Sporkin’s investigators, kept other files nearby, as well as old newspapers he intended to read and boxes jammed with documents only he could find. The boxes were everywhere; they had grown like moss around an ancient oak. One day, Pearce said, he would go through and sort it all properly. But that day never came, and new boxes had piled up on the old ones.

  That Thursday, however, Sporkin called for help. Personal materials were hauled away to his house in suburban Maryland. Sporkin dumped many of his old SEC files in Pearce’s office. He didn’t want just to throw them away, so he thought he’d have a little fun by depositing them anonymously with Pearce, who wasn’t around that day. Sporkin figured Pearce would probably never notice new mounds of clutter loaded into his office.

  In the enforcement division files, there were a thousand secrets: confidential Securities and Exchange Commission memos, testimony taken from the targets of Sporkin’s investigations, private corporate records handed over to the SEC with the assurance that they wouldn’t be made public. The SEC’s enforcement division, which Sporkin had headed since 1974, did most of its work in secret, as did the rest of the SEC. The commission was the federal agency responsible for policing the nation’s financial markets and regulating 9,000 publicly owned corporations, 3,500 brokerage houses, 3,700 investment advisers, and 1,300 investment companies. The job of Sporkin’s enforcement division was to oversee a litany of laws proscribing what was popularly called “white collar crime.” Under Sporkin, the division had gained a worldwide reputation.

  But now the feared and celebrated enforcement chief was on his way out. A month earlier, in April 1981, the newly elected Reagan administration had announced that Sporkin was to become the Central Intelligence Agency’s general counsel, its chief lawyer. In the wake of his announced departure, there was talk of major changes at the SEC. Exactly what Shad wanted, whom he would select as Sporkin’s replacement, and what kind of institution the SEC would become after Sporkin left was very difficult that May to predict.

  It was Stanley Sporkin, himself, who had become a key issue for members of the ascendant Reagan team. Their transition report said outright that he should be replaced. He was only a civil servant, equal in rank to four other division directors at the SEC, none of whom could make policy or file lawsuits on their own. A division director such as Sporkin needed a majority vote from the five presidentially appointed SEC commissioners to bring an enforcement action or even issue a subpoena as part of an investigation. By the spring of 1981, however, Sporkin’s power belied the commission’s organization chart. Between 1977 and early 1981, Harold Williams, a Democrat and former corporate executive, had been the SEC’s chairman. He had battled with Sporkin for control of the SEC’s agenda, and to shape its priorities. Still, it was Sporkin’s ideas about corporate morality and the SEC’s public service mission that often defined the commissioners’ debate at their regular closed meetings on the seventh floor. To the public, and to the corporations and Wall Street firms the SEC regulated, Sporkin was the commission.

  If you had a problem with the SEC, it was Sporkin who could take care of it. If you were the target of an SEC fraud investigation, you made a pilgrimage to Sporkin’s corner office, sometimes to sit on his seventy dollar, tufted, ugly, one-armed couch and negotiate your peace. Sporkin greeted you with his jacket off and tie loosened, a picture of wrinkled agitation, like a newspaper editor on some perpetual deadline. As you made your defense, Sporkin would often lean back and shut his aqua-colored eyes, as if he had fallen asleep. Then, as voices lulled and you were certain that he had nodded off, he would spring from his seat and pace like a cat, firing off a list of conditions and settlement terms. He was tough, the lawyers who battled him generally agreed, and they said, too, that it would be foolish to underestimate Stanley Sporkin’s authority or zeal.

  It was the zeal, the sense of mission, that so attracted and repulsed people when they dealt with Sporkin. The young staff lawyers he recruited to the SEC from top law schools and prestigious corporate firms considered Sporkin to be the consummate public servant, the Ralph Nader of the federal government. Like Nader, Sporkin had his rumpled peculiarities, and he projected an air of righteousness. He was an activist who defined the SEC’s purpose broadly and possessed the talent to extend its reach.

  Goaded by Sporkin, the SEC chased big corporations for paying bribes in far-off countries of the Third World. At home, it cracked down on illegal political contributions. And Sporkin’s cases grabbed headlines and generated fear. Even before the SEC formally went after New York–based United Brands for paying bribes in the mid-1970s, its top executive Eli Black took his life by jumping out a window in the Chrysler Building. When the SEC later sued United Brands for paying bribes to members of the Honduran government to lower the Central America
n country’s banana-export tax, the resulting publicity toppled the Honduran president within a month. Scandal rocked the Japanese government when Sporkin prosecuted the aircraft manufacturer Lockheed for making overseas payoffs. Reformers in Congress enacted sweeping domestic campaign law revisions because of cases he filed against U.S. corporations that maintained slush funds for national political candidates. Working for Sporkin, jetting around the country, negotiating with top defense lawyers and their powerful clients, investigators in the SEC’s enforcement division felt with good reason that they made a difference in the world. It was a far cry from the work at other bureaucracies around the capital, where the institutions seemed too often stagnant, captured by the industries they regulated. At the SEC, Sporkin’s lawyers felt they wore the white hats.

  As his power had grown, as his policies had become more effective and more creative, Sporkin had met with increasing resistance from the commissioners on the seventh floor and from his rivals within the commission. At the table in the hearing room where closed SEC meetings were held, the tone of debate had grown increasingly heated in recent years. All the fighting literally made Sporkin sick. He attributed a gall bladder problem that required surgery in 1980 in part to tension from his battles inside the SEC.

  There were two layers to the debate about Sporkin. One had to do with the issues, whether Sporkin’s approach to enforcement was correct under the law. The other layer was less polite and had to do with power. “What frightened me most about Sporkin’s power at the time I became a commissioner was the fear he aroused of both him and the SEC,” wrote Roberta Karmel, an SEC commissioner from 1977 to 1980, not long after Sporkin left the commission. “No unelected government official should wield that kind of power too long.”

  Before he left his office for the last time that Thursday, and headed off to dinner with John Shad and the others, Sporkin met with David Doherty to talk about Mobil and Citicorp, two cases that exemplified the ambitious prosecutions Sporkin had inspired at the commission. If it was no longer possible for him to wield the power opponents such as Karmel found so threatening, then perhaps he could bequeath his clout to handpicked successors. Doherty was typical of the lawyers who worked closely with Sporkin. It was a tightly knit group. Many of them intended to stay after Sporkin was gone and they were concerned about how the new chairman, Shad, a Reagan campaign fund-raiser from Wall Street, would treat them. Doherty was an associate director of the enforcement division, one notch below Sporkin, and he was intensely loyal to his boss. So were others like Ted Levine, another associate director, and a leading candidate to take Sporkin’s job.

  There were other investigations pending in the enforcement division that May, of course, but Mobil and Citicorp were the most important. Each was a model of how Sporkin approached law enforcement and how he thought the SEC should fulfill its regulatory mission. In each, Sporkin had considered filing public charges against a major corporation for failing to disclose questionable conduct to its shareholders. In Citicorp, the alleged misdeeds involved foreign currency transactions the bank had engaged in to avoid overseas taxes. That case was less pressing; it would be months before it was presented at a closed meeting to the five SEC commissioners for final action. The Mobil matter, however, was in its final stages. It was Sporkin’s legacy on the seventh floor, and he wanted to be sure that Doherty shepherded the case successfully through the SEC.

  They discussed strategy, legal details, office politics, the upcoming closed hearing—the bread and butter of Stanley Sporkin’s life for nearly two decades. Finally, there was nothing more that Sporkin could do. It was Doherty’s case now.

  That evening Stanley Sporkin collected the last of his things and left the building.

  It was a different Washington into which he stepped.

  That May of 1981, the capital was undergoing one of its quadrennial postelection renewals. It was part calculated politics, part cultural theatrics. Washington, for more than a century, had been used as a kind of canvas on which politicians sketched symbolic pictures of the country’s mood. This was especially true following presidential elections, when the members of a new administration came pouring into town, beaming with energy and ambition, wearing the styles that had carried them to victory. Beginning with Andrew Jackson, who stomped through the White House in muddy boots to show that he was a man of the people, the “political arrival” grew into a capital art form. With the advent of television, the presidential inauguration and its aftermath became a carefully crafted extravaganza handled by specialists in pomp. It was a chance for a newly elected president to set the tone of his administration, to remind the voters why they had entrusted him with power. Flanked by his beautiful and well-dressed wife, John F. Kennedy, the youngest president in history, went hatless in the cold in 1960 to emphasize his youth and vigor. Jimmy Carter eschewed a car during his inaugural parade and walked smiling and waving down Pennsylvania Avenue, reminding his television audience that he was a casual, informal man “as good as the American people,” as his campaign had put it.

  Like everybody else in the capital, and as they had several times before, the senior lawyers and investigators at the SEC in Washington were now watching with interest a new drama: the arrival of Ronald Reagan’s administration, in early 1981. For those in the business of regulating the nation’s finance, it was in some ways an unnerving spectacle.

  It wasn’t just the money, although there was plenty of that. It was the character of the people who came to the capital that winter and spring, their style. Beginning almost immediately after Reagan’s crushing victory over Carter, the private jets began to arrive at Washington’s National Airport. From the cabins stepped silver-haired businessmen and industrialists and lawyers, men who by and large had never spent much time in Washington before, whose fortunes had been earned and not inherited, who considered themselves deserving of their wealth, and whose radically conservative ideas about government were in many cases untempered by any experience working for the public good. Dressed in double-breasted pinstripe suits with handkerchiefs neatly folded in their lapel pockets, many of these men looked like the kind of financial sharpshooters whom the SEC had often prosecuted. As officers at the country’s largest corporations and Wall Street banks, or as partners in the biggest law firms in New York, these Reagan loyalists knew the SEC as a powerful and self-satisfied agency prone to moralizing. Some of them despised the commission.

  They came to Washington seeking jobs in Ronald Reagan’s government, or to become advisers to the president without portfolio, in part because they sensed the change that was in the air. Nobody in the capital that winter and spring could have missed it. Radically conservative intellectuals who had flocked to Reagan’s campaign trumpeted that a revolution was at hand, one in which the capital’s sprawling federal bureaucracies—with the exception of the Pentagon—would be pared to the bone. Taxes would be slashed, defense spending raised, and somehow, the federal budget balanced. Reagan would get government off the backs of the American people and, free from burdensome interference, business would flourish. AMERICA, said the sign in the lobby of Washington’s L’Enfant Plaza Hotel, A GREAT NEW BEGINNING.

  What seemed a political fantasy was complemented by an air of Hollywood escapism. The story began with a happy ending: after 444 days in captivity, the fifty-two Americans held hostage in Iran were freed just as Reagan was sworn in. The new tone was set perhaps most conspicuously by Nancy Reagan, the former actress and new First Lady. Unabashedly, she raised a quarter of a million dollars from friends in California to pay for new White House china and interior decoration, and then badgered the Carters to leave the place early so she could get to work. During a difficult winter, when inflation was soaring and small businesses around the country were closing because of high interest rates, Nancy Reagan spent $25,000—more than the country’s annual per capita income—on clothes to wear to the inaugural balls. One inaugural gala was so extravagant that it had to be staged at a sports arena with 19,000 seats. T
here, men in shining tuxedos and women wearing full-length minks and sables over their designer gowns partied into the night, led by a cavalcade of singers and stars from Reagan’s Hollywood.

  Reagan’s men considered the display a service to the nation. Charles Wick, the businessman and financier who was cochairman of the festivities, said that for those in the country who were suffering economically, watching the Reagan inaugural on television would have the same uplifting effect as Hollywood movies did on the nation’s poor during the Great Depression. Greed, as one of Reagan’s financial backers would later tell a group of college students, was good.

  The Securities and Exchange Commission—as a law enforcement institution and as a national symbol—stood in opposition to such bold ostentation in May of 1981.

  On the surface, it looked like a modest place, though its appearance understated its power and influence. Sequestered in the shadows cast by Capitol Hill, boxed in by crumbling homes and offices, the commission’s headquarters was as dull a building as existed in Washington, no small distinction in a city that often confused drabness with virtue. With its poured concrete, plate glass, and straight lines, and durable coats of pallid paint, the headquarters seemed a consummate expression of utility. It was the architectural equivalent of wash-and-wear.

  The building’s facade suited well many of those who strode through the front door each morning, purposeful and confident, briefcases gripped firmly, pens clipped in breast pockets. Not for them the pomp and fashion of the capital’s great political buildings nearby—the loud power of the domed Capitol, for instance, or the self-conscious authority of the Supreme Court, where granite steps rose to tall marble columns, forcing visitors to climb like supplicants seeking wisdom from an oracle. At the SEC, power wore an unobtrusive face. For nearly fifty years, the agency had ruled over the economy, creating and supervising trillion-dollar financial markets, chasing crooks, closing wayward businesses, and at times playing God on Wall Street by deciding who would keep his fortune and who would give it back. Far beyond the size of its budget, the number of its employees, or its congressional mandate, the SEC had grown to become one of the mightiest agencies of the federal government. By the end of the 1970s, the SEC was the institution in Washington that Wall Street and Corporate America feared most.