Eagle on the Street Read online

  Many of the lawyers and investigators who worked for the commission had come to cherish both their unusual power and their anonymity. They liked to be feared—among other things, it was a way to keep their adversaries off balance. And so, to protect their growing authority and feed the guilty imaginations of those who dreaded them, the commission staff revealed as little of themselves as possible. SEC lawyers conducted their investigations in secret. Commissioners made far-reaching policy decisions at closed-door meetings from which the public and even the Congress were excluded. Staff interpreted the law without consulting other agencies of the federal government. They considered themselves independent, protected if not altogether isolated from the emotional tides of electoral politics that swept through Washington every four years.

  Increasingly at the commission, the staff thought of itself as a permanent and elite corps of policemen and policymakers whose mission was to define and enforce morality on the byways of American capitalism. In the hallways of their headquarters they talked about it like that—the SEC staffers were the good guys, the cops, and the economy they supervised was populated by legions of avaricious outlaws and bandits. The agency’s symbol was a bald federal eagle with an olive branch in one claw and arrows in the other; its efforts to keep a sharp eye on Wall Street had prompted some to refer to the commission as “Eagle on the Street.” Only through vigilance and discretion and discipline, the SEC staffers thought, could the commission save Wall Street and the nation from itself.

  The sin most often denounced by the commission was greed, but what distinguished the SEC from, for example, the Catholic Church was the commission’s deep and historical ambivalence about this manifestation of moral weakness. The sum and effect of all the SEC’s rules and regulations, and of its fifty years of law enforcement, was that the commission believed a strong desire to make money and profit was good, but that unchecked greed was evil. The profit motive played an essential role in healthy and efficient financial markets, but rampant greed could throw the country’s economic machine out of whack, enriching a few at the expense of many or at the cost of collective imperatives such as breathable air or stable prices or even something as intangible as social equity. Ever since it was created in response to the country’s populist disgust over the scams and scandals of the 1920s—and over the 1929 market crash and depression that followed—the commission’s lawyers and investigators had struggled to decide how much greed in America was too much.

  The commission was created by Congress in 1934 to attack the corruption and greed on Wall Street exposed in the 1929 stock market crash. When Joseph P. Kennedy—patriarch of what would become the nation’s greatest political family and a Wall Street titan who profited handsomely and fraudulently during the crash—was named to be the SEC’s first chairman, there were those who sounded warnings about the fox and the chicken coop. But Kennedy appeared to prosecute Wall Street fraud to the hilt during his year-long tenure and the agency acquired a reputation for strength and integrity early on.

  Much of the SEC’s charter was defined in its early years by such legal minds as James M. Landis, William O. Douglas, and Felix Frankfurter, fixtures of the New Deal intellectual landscape. When the New Deal was overtaken by war and the commission’s founding fathers moved on to the Supreme Court, the agency began to drift in the manner of most federal bureaucracies, often reflecting the prevailing political mood in Washington in its own prosecutorial priorities. During World War II, the SEC’s headquarters was moved to the Pennsylvania Athletic Club in Philadelphia, and its influence waned in favor of more pressing national security concerns. Still, the agency pursued a fundamental restructuring of the once-badly corrupt public utility industry. But the agency’s budget was cut so severely by the Eisenhower administration in the mid-1950s that it had resources to prosecute a few blatant fraud and financial-market-manipulation cases but little else.

  In the early 1960s, swept along in Kennedy’s wake, intellectuals arrived again at the commission to reawaken the place, bringing with them high ideals and equally lofty pretensions. Slowly the power of the bureaucracy was centralized, just as the power of other federal agencies grew during eight consecutive years of Democratic reign in the capital. It was during this Great Society era of expansion and growth that the SEC established itself as the policeman of Wall Street and the guardian of the small investor. In 1968, Congress passed the Williams Act, which put the SEC in charge of administering and developing rules of conduct for the multimillion-dollar corporate takeover game. Under Nixon, keeping up with the times, the SEC had a minor political scandal—its first—when G. Bradford Cook resigned after only two months as chairman amid allegations that he took part in a scheme to protect a major Nixon contributor from SEC charges. It was a challenge to the SEC’s reputation for uncompromising integrity and independence. But the agency rebounded strongly during the 1970s, spurred by Stanley Sporkin’s cabal of committed prosecutors in the enforcement division.

  With Sporkin, it wasn’t so much whether something was illegal; what mattered was whether it was wrong. Overseas bribery and political payoffs—crimes that catapulted the SEC to international renown during the 1970s—had little relevance to the nation’s securities laws, which the SEC was supposed to enforce. Those laws had been enacted mainly during the 1930s, in the aftermath of the 1929 crash, and were designed to rid the stock market of fraud and give public shareholders a fair shake.

  During the 1970s, the SEC’s enforcement division stretched the law to suit its needs. The crusade against corporate corruption began in the fall of 1974, shortly before Sporkin was promoted to enforcement chief, when the rumpled prosecutor would go home to his wife and family in the suburbs and turn on the local public TV station, channel 26, to watch nightly replays of the last round of the congressional Watergate hearings. By then the nation’s fascination with the hearings was on the wane. Nixon had resigned; the drama was finished. But the Watergate committee still had witnesses to hear from. Among them were executives from the Northrop Corporation, American Airlines, the Gulf Oil Corporation, and other giant companies. They testified about large, secret cash payments made to Nixon’s 1972 Committee to ReElect the President, or CREEP.

  As he watched, Sporkin was outraged. Somehow, this has to be a securities law violation, he thought. A trained accountant, he wondered how the companies had reflected their illegal campaign contributions on the financial reports they filed every three months at the SEC’s headquarters in Washington. When he ordered his investigators to dig into it, Sporkin found that the companies hadn’t listed their domestic and foreign bribes at all. Why would they? The payments had been against the law. Were the companies supposed to confess to felonies in their SEC financial statements?

  Sporkin decreed they should. If companies stopped paying bribes, the SEC began to assert, their earnings would decline because they would lose business. Therefore, the bribes themselves needed to be disclosed when paid. When the country’s multinational corporations argued that the bribes were so small they need not be reported, Sporkin answered that it was the millions of dollars in revenue and profits that flowed from the bribes, rather than the small bribes themselves, that mattered in making the judgment.

  It was a novel, creative, but disingenuous theory. The SEC served notice under Stanley Sporkin that it would sue any company or anybody who failed to disclose illegal acts promptly and publicly at the commission.

  In the years of upheaval following Watergate, it was easy to see Sporkin’s crusade in partisan terms, and many did. Conservatives denounced his zealotry as thinly disguised liberal politicking. Liberals cheered his pursuit of Republican moneymen. But such assessments were too pat. Sporkin was a lifelong Republican who late in his career registered as an independent, and he maintained close friendships with Republican leaders such as William Casey, Ronald Reagan’s 1980 campaign chairman and Central Intelligence Agency director. It was Casey, himself a former chairman of the SEC under Nixon, who had persuaded Sporkin to leave the
commission for the CIA after Reagan’s victory. It was legend at the SEC that Casey had once followed Sporkin’s advice by resisting political pressure from Nixon aides who wanted to block an SEC probe on the eve of the 1972 presidential election. “Some day you’ll thank me” for the advice, Sporkin had told Casey. Now Casey was taking him to the CIA.

  The theories Sporkin developed at the SEC during the 1970s provided the commission with a virtually unlimited mandate. So sweeping was Sporkin’s interpretation of the disclosure requirements of the federal securities law that, by the late 1970s, virtually any improper conduct at a publicly owned corporation fell within the SEC’s jurisdiction. The genius of Sporkin’s approach was that it shifted the burden of law enforcement from government to industry. No longer was the SEC merely a cop on the Wall Street beat, whistling on the proverbial street corner with its eyes open for suspicious activity. Instead, Sporkin projected an image of the commission as a kind of regulatory confessional. Wrongdoers of every stripe, but especially those at the country’s largest corporations, were invited to admit their sins voluntarily in the SEC’s public filing room—or else face the commission’s wrath.

  By the spring of 1981, when Sporkin finally left, that was a choice many of the country’s biggest companies had grown tired of making.

  “I think there have been times when the commission has been unfair,” John Shad told Stanley Sporkin.

  It was the night of Sporkin’s departure from the SEC and they were seated with their wives amid the chime and clank of silver and china in a comfortable Georgetown restaurant, miles from the seedy strip of prewar government buildings where the SEC had its headquarters. Shad was staying at the Georgetown Inn, a clubby, richly appointed hotel on Wisconsin Avenue. He was preparing to move to Washington from his Park Avenue apartment in Manhattan. The new SEC chairman was friendly, pleasant, respectful, a chain-smoking bulldog of a man with drooping jowls and an affable manner. He had invited Sporkin to dinner because he wanted to pick his brain about how the SEC really worked, and about how it might be changed. Shad was candid: He thought Sporkin had taken the enforcement program too far. Now, at the beginning of the Reagan era, it was time to roll back regulation.

  “I can understand how people would feel that way,” Sporkin answered. By now he was used to the complaints about his aggressive prosecutions; they had grown into a chorus on Wall Street and in corporate boardrooms.

  “John,” he continued, “you have to understand that we had to keep a tight rein on the marketplace or else it will get out of control. Enforcement is an extraordinarily important program. It has to be in every area and it has to have a presence.”

  For most of the dinner, Sporkin had been doing the talking. Shad was enormously inquisitive, like a sponge soaking up information. He was unfamiliar with the SEC’s inner workings and was still learning. Shad and Sporkin were both self-confident, plain-speaking men, sure of themselves but not combative. And there was an unspoken bond between them; both men admired and respected Bill Casey, the Reagan CIA director, and both considered him a friend. That helped ease their suspicions.

  Sporkin summarized his ideas about enforcement for Shad. They boiled down to what Sporkin and his lieutenants sometimes termed the access theory. There were thousands of brokerage firms on Wall Street subject to SEC regulation and enforcement, but about a hundred of them were doing 95 percent of the business. These were the big firms that provided access to the marketplace for all sorts of investors—huge pension funds, university endowments, mutual funds, and millions of individuals across the country. These big firms also provided access to the market for companies that wanted to raise money by selling new issues of stocks and bonds. The key, Sporkin insisted, was to concentrate enforcement on these access points, on the big investment and accounting firms that handled millions of transactions annually. A giant investment house like E. F. Hutton, where Shad had spent the last decade as vice chairman, cherished its SEC license to do business. By disciplining brokerage firms with access to the nation’s marketplaces, by holding the institutions responsible for the acts of their employees, the SEC could encourage effective self-policing and make its limited resources go a long way.

  Shad listened. He asked questions. But it seemed to Sporkin that the new chairman really didn’t know or understand the commission’s enforcement program very well. Perhaps that would take time. Or was Sporkin sensing Shad’s biases as a man who had spent his entire professional life on Wall Street, who had little experience with or tolerance for the priorities of Washington bureaucrats? Sporkin wondered whether Shad would make the enforcement division weaker as part of President Reagan’s deregulation program. But over one dinner it was hard to answer those kinds of questions.

  Do you have any suggestions about who should be your successor? Shad asked.

  “Ted Levine,” Sporkin answered without hesitation.

  The bearded, intense Levine was the obvious choice inside the commission. He was a brilliant lawyer, and experienced. The enforcement program’s institutional memory was critically important, Sporkin believed. New enforcement directors had always been appointed from inside—and there was a reason. So much of the fraud and abuse the SEC pursued was repetitive. The same con artists appeared in different parts of the country to practice new versions of their old tricks. Corporations and Wall Street firms always tried to test the commission’s limits. You had to know what had gone on before.

  Shad gave little indication of his feelings about Levine, but Sporkin sensed Shad would hire someone from outside the agency to replace him. What didn’t need to be said was that Levine was a Sporkin loyalist, a member of the old guard at the commission. And despite his diplomacy, his respect, Shad had made one thing clear to Sporkin over dinner. There would be changes at the SEC, and soon.

  “Mobil? Is there someone here from enforcement on Mobil?” John Shad asked from his high-backed swivel chair at the round table where the commissioners held their private debates. It was July 23, 1981, two months after Sporkin’s departure. Shad had been on his new job for only a few weeks and not all the faces were familiar.

  On the side of the table where the staff sat, David Doherty indicated his presence. There were other lawyers from the enforcement division with him and still other SEC staff sitting in the chairs toward the back, set up for commission employees to observe proceedings closed to the public. Sporkin, then at the CIA, was absent from his traditional seat beside the big pillar that separated the commissioner’s side from the staff’s side. Commission policy was made at the wooden table where they sat in the closed meeting room, which actually was two horseshoe-shaped tables pushed together at the ends, leaving a hollow ring in the center. Inside the SEC, people spoke of arguing a case “at the table,” as though it were like performing at center stage on the opening night of a Broadway show. All around the closed meeting room were signs of the SEC’s rich past: an old bookcase in the corner where the records of the earliest commission decisions from 1934 rested; colorful flags; and on the wall a wooden SEC seal with its eagle clutching arrows and an olive branch. Across the room hung a portrait of the late Manuel F. Cohen, considered in his day to be the consummate agency official and keeper of the SEC’s tradition—the tradition many staff feared was now to be undermined by Shad, one of the vanguard of the Reagan Revolution. They had come to the closed meeting room to find out if their suspicions were justified.

  The Mobil case symbolized to some at the SEC what was good and right about the Sporkin era at the commission and to others what was wrong with the enforcement program. The case involved Mobil’s failure to disclose to its shareholders that Peter Tavoulareas, the son of Mobil’s chairman, was part-owner of a shipping company that had close ties to Mobil. There were questions about whether the shipping company had received money and favors because of the family ties. But the case was fraught with political and legal complexities. A key question was whether the shipping company was actually a subsidiary of Mobil—if it was, then Mobil would likely be r
equired to disclose the details of the business and family relationships under SEC rules. The traditional way to determine whether one company was a subsidiary of another was to examine ownership. Was the shipping company owned by Mobil?

  The answer was no, which meant the SEC probably did not have a case it could win in court if Mobil wanted to fight. Still, Doherty had written in a confidential memo to the SEC commissioners, “The investigation has disclosed that [Mobil chairman] William Tavoulareas was directly involved in numerous transactions and management affairs relating to the marine management company in which his then 24-year-old son was a principal … Mobil has never made any disclosure of these matters in its filings with the commission.” The enforcement division’s argument was that even though Mobil didn’t own the shipping company in question, it was nonetheless a “de facto subsidiary” because of the nature and extent of its business ties with the oil giant. Mobil should have disclosed these ties, the enforcement staff said, rather than trying to paper over the business relationship between father and son.

  Not everyone inside the SEC was sure what “de facto subsidiary” meant, or whether it was a legally valid concept. Lawyers in the corporate finance division of the SEC, which was responsible for monitoring the reams of public account statements filed by companies at the commission, worried that Sporkin’s brainchild could have unforeseen—and potentially undesirable—consequences. The Mobil lawyers thought the SEC enforcers were way off base, but they were looking for a reasonable way to put the matter behind them. There were other difficulties, too. Tavoulareas had initiated a libel suit against the Washington Post over its reporting on the matter; any decision the SEC made could have an impact on that case. And some members of Congress were pressing for action.