Eagle on the Street

  Judge Pollack had his own ideas about the theories that might justify levying such massive and unprecedented fines on a Swiss bank, but he also was evidently impressed by the SEC’s arguments. On November 6, he delivered a decision that within hours of its issuance would rock the tight-knit Swiss banking fraternity in Zurich and Bern.

  “There is something wrong with having somebody standing out there invading the market over here, doing something illegal and saying, ‘You can’t get me because I’m anonymous,’” Pollack announced from his courtroom bench to an awestruck Blackburn. “The game has proceeded long enough and the SEC should not be any longer put off.”

  Fedders had won—it was a total victory. Pollack’s decision not only devastated modest-sized Banca Della Svizzera, it immediately threatened Credit Suisse, the bank sued by the SEC in the Santa Fe case. Within days, lawyers for the Swiss banks and political officers from the Swiss embassy were peppering Fedders’s office with phone calls, urging compromise. There was even talk of a new, landmark treaty between Switzerland and the U.S. For the SEC’s new Reagan Republican leaders, viewed with suspicion by their staff, it was a public victory to savor. And within weeks, Fedders was launched on a transoceanic diplomatic odyssey that would carry both him and Shad to international renown, cementing the SEC’s new image while sending a strong and largely unexpected message to Wall Street.

  Fedders and a diplomatic delegation from the Reagan administration flew to Switzerland to open negotiations aimed at solving the bank-secrecy crisis. SEC enforcement division staff had prepared fat, black briefing books for Fedders about the intricacies of Swiss banking politics, including sensitive portraits of the leading personalities in Bern and Zurich. Secrecy was a billion dollar business for the Swiss banks. They were not about to yield their franchise to a bureaucrat from Washington.

  Fedders devoured the briefing books. Already he had proved to his skeptical staff that he was willing to work harder than any of them. When he touched down in Switzerland, he was well-prepared. At first there were the usual cocktail parties and stiff meetings dominated by protocol. A diplomatic note had been prepared beforehand with the help of the U.S. State Department. At the Swiss Justice Ministry, Fedders attended a preorchestrated meeting where the diplomats read from scripts and articulated their preconceived ideas. Fedders performed skillfully; he was commanding and concise. And there was progress amid the protocol. The governments agreed that they should develop a new treaty arrangement to permit the SEC to obtain the names of alleged wrongdoers from Swiss banks—after following certain legal procedures supervised by the Swiss government.

  But the success of the trip hinged on whether Fedders could yet persuade the major Swiss banks to participate in the diplomacy. One of Fedders’s aides advised him that the bankers were deeply suspicious and that, if the leading executives in Zurich did not consider a treaty to be in their interest, no treaty would be signed. That was a fact of Swiss political life, the aide said.

  A few days after they arrived in Switzerland, Fedders and some of his delegation flew to Zurich for a luncheon sponsored by the Swiss-American Chamber of Commerce. Fedders was told that he would have to deliver a winning speech to a vast audience of Swiss bankers. If he impressed them, there was a chance they might yet obtain the names of the account holders at Credit Suisse who had earned millions of dollars at the expense of Gary Sampson and the options traders in San Francisco. If Fedders failed, the enforcement division would be back virtually where it started.

  The suspicion, even hostility, among the Swiss bankers was palpable to some of the U.S. lawyers and diplomats who took their seats in the ballroom of the ornate Doldergrand Hotel that afternoon. The Swiss banking executives saw Fedders as the imperial American bogeyman, a caricature familiar even in sedate Switzerland. As far as the bankers were concerned, it was Fedders who had pointed the gun at Banca Della Svizzera’s head and who had pointed one as well at venerable Credit Suisse. The chief executive of Credit Suisse, Rainer Gut, was to introduce Fedders to the audience. The room was tense and hot. Television lights flooded the dais. Fedders sat in the guest of honor’s chair.

  Fedders had done a fair amount of speaking while in private legal practice and he enjoyed it; he was drawn to the attention and applause. He had prepared a bland, safe speech about the growing internationalism of the securities markets and the importance of intergovernmental cooperation. But he had been told in the last few days that it was essential that he open his talk with some light remarks complimenting the Swiss and their system of banking and government. Fedders had been mulling this challenge over and had come up with an idea, which he shared with no one. The idea was inspired by a story in a local Zurich newspaper, which described an annual Swiss opera singing competition for young vocalists from around the world. Fedders had never heard of the competition before, but he asked Jim Fall, a Treasury attaché at the U.S. embassy in Bern, to find out the name of the local opera house in Zurich and the names of Switzerland’s three best operas. Fall, puzzled, made the inquiries.

  Rainer Gut of Credit Suisse presented Fedders with a big silver plate during the introduction, and all Fedders could think about was how he was going to have to give this thing back to the U.S. government because of the federal laws proscribing public servants from accepting foreign gifts. Then the applause died and Fedders was standing at the podium, the center of attention. In a deadly earnest tone, he began to tell an elaborate, and under the circumstances, hilarious story from his youth.

  “It has been a great, great opportunity to come back here to Switzerland,” Fedders told the bankers. “I was here once before, years ago. I came over to Switzerland at the age of eighteen for the first time as an aspiring opera star for the renowned youth singing competition here in Zurich. My sole ambition in those days was to be an opera star. Actually, on that trip, I met Rainer Gut for the first time, when I was only eighteen …”

  Here Fedders paused and looked over at Gut, who appeared puzzled.

  “Mr. Gut was in the audience when I performed,” Fedders continued, saying that Gut had actually been in the first row, one of the judges.

  He turned to the Credit Suisse chief executive. “You gave me a great ovation at the end of my performance, and the audience called, ‘Encore! Encore!’ And I sang the song again and there was more applause. ‘Encore!’ And I sang the song again.

  “And the fourth time I sang the song, I leaned down to Rainer Gut and I said, ‘How many times do I have to sing it?’

  “And he said, ‘Until you get it right.’”

  The bankers laughed and applauded loudly—the self-effacing conclusion struck the right note, especially since it deferred to the powerful Gut. Afterward, the U.S. diplomats and lawyers praised Fedders heartily. Even after the story was retold as fact in the Zurich newspapers the next day, hardly anyone—and certainly not Fedders—made a point to note that the anecdote was a complete fabrication, made up from whole cloth.

  The story served Fedders’s purpose and the remainder of his speech was well received. The Swiss trip ended triumphantly: The government and the bankers agreed that a new treaty arrangement was necessary. Six months later a Memo of Understanding was signed in Washington, establishing new procedures for the SEC to obtain the names of alleged inside traders who used Swiss bank accounts to protect their identities. The insiders who bought Santa Fe stock options from Gary Sampson and his colleagues in Santa Fe were identified as a host of Kuwaitis, American executives, lawyers, accountants, and even a Washington, D.C., lobbyist. Much of the money lost in the Pacific exchange’s options pit was eventually recovered. The SEC’s Blackburn, too, identified a stockbroker named Giuseppe Tome as the alleged inside trader who had tried to hide behind an account at Banca Della Svizzera, and in that case the SEC won another important victory, recovering several million dollars. Most important of all, the SEC enforcement division had broken partially through fifty years of Swiss banking secrecy, one of the biggest obstacles to successful insider trading pros
ecution. A new phase in international law enforcement had been inaugurated during Fedders’s first months on the job.

  Fedders returned to Washington feeling triumphant. It was a sensation he savored, but it would not last for long.

  4

  Closed Meeting

  Jack Shad sat at the head of the table in his high-backed swivel chair, and saw that he was outnumbered by the SEC staff—as usual. There were at least seven of them across the polished table ready to participate in the day’s debate, all of them lawyers, none with extensive experience in business or on Wall Street. These were the people Shad had been warned against by some of his brokerage colleagues and some senior SEC officials before he came to Washington—bureaucrats who had never traded a share of stock in their lives, but who nevertheless exercised wide control over the nation’s business.

  The gaggle of staff in the eighth-floor meeting room at SEC headquarters that day was led by the lean and towering Fedders, the only one of them who had been recruited to the SEC by Shad. Several of the others seemed increasingly frustrated by Shad’s policies. They had come to the commissioners’ meeting that Tuesday morning, December 22, 1981, three days before Christmas, prepared to do battle for a cause in which they fervently believed.

  To the enforcement staff led by Associate Director David Doherty, the SEC’s three-year investigation of questionable financial dealings by the New York–based, multinational bank holding company Citicorp was more than an important case in its own right, involving legal violations the staff considered serious. It was also an important symbol of how the SEC intended to police Wall Street and the corporate world during the Reagan years. Would Shad’s SEC have the courage to punish any corporate violator, no matter how large or politically influential? Would the commission send a message to Wall Street that the inauguration of Ronald Reagan did not signal a relaxation of white-collar prosecutions? Would the SEC’s fearsome reputation during the 1970s, when its investigations shook the boardrooms of Fortune 500 companies, continue to provide deterrence to wrongdoing in this new political era of business boosterism?

  Shad, too, saw the Citicorp case in broad and even symbolic terms, but the questions he wanted to ask were different. Could the SEC’s bureaucratic enforcement staff be persuaded that it did not have the power to impose its morality on corporations and brokerages, regardless of the law? Could the enforcement staff understand that the costs and benefits of its prosecutions—for the economy, for the federal government’s budget—had to be balanced? Could it accept that most businessmen and Wall Street financiers were not crooks?

  “It’s a big one,” Shad said of the Citicorp case as the meeting began. About that, if nothing else, everyone in the room agreed.

  For months the case had been festering inside the SEC. Debate over the investigation had gradually intensified, settling finally into a bitter stalemate. The controversy was unknown to the public; the case, like most SEC investigations was a tightly guarded secret. The facts uncovered by the enforcement staff would be revealed only if the politically appointed commissioners voted to file charges. While the commission’s overseers focused that fall on public battles over the size of the SEC’s budget and its campaign to break down Swiss-bank secrecy laws, the fight over Citicorp had been carried on privately inside the commission’s downtown headquarters.

  John Fedders, Shad’s new enforcement chief, thought that the passions stirred within the commission by the Citicorp case had at least as much to do with personalities, politics, and institutional change as with the actual facts of the investigation. When Fedders arrived at the SEC, he saw almost immediately that the case was fraught with difficulties. There were about eight hundred open enforcement investigations in the division when Fedders got there, and the Citicorp case was one of the biggest—for three years, the investigation had been draining manpower and resources. The staff was only now considering whether it was time to file fraud charges against Citicorp and its subsidiary Citibank, one of the largest multinational banks in the world.

  At issue were questionable dealings by the bank in the exploding and largely unregulated foreign currency markets, where banks and other traders speculated—sometimes wildly—on which of the world’s major currencies were going up in price and which were going down. The transactions under investigation by the commission had produced about $46 million in profits for Citicorp, a large amount in absolute terms, but a relatively small percentage of the bank company’s massive revenue. Currency trading was not an area where the SEC had any natural jurisdiction—it was outside the scope of the federal securities laws the agency enforced. Moreover, there were other federal regulators in Washington—the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Internal Revenue Service—that oversaw aspects of Citicorp’s foreign exchange dealing. Still, the SEC’s aggressive enforcement staff had been drawn to the case because it involved alleged illegal schemes and tax evasion that nobody else in the capital had detected or prevented. At the closed meeting in 1978, when he sought and received authority from the SEC to issue government subpoenas for Citicorp’s records, Stanley Sporkin had argued that the investigation was necessary in part to sustain the public perception that the commission was afraid of no one, not even a giant bank. “One of the great benefits we have from our program is that we [have] got all kinds of confidence out there,” he had said. He believed that Citicorp had made misleading disclosures to its shareholders about the legal and financial risks involved in the way it traded money around the globe. He wanted the bank to make a full disclosure of its questionable conduct in the SEC’s public-filing room, something all the world would see.

  That summer and fall of 1981, some of the enforcement lawyers who talked with Fedders about the case said they wanted to widen the probe’s scope and keep pushing for new information. In his corner office on the fourth floor, in between his work on insider trading and his efforts to reorganize the enforcement staff, Fedders received a series of briefings from Thomas von Stein and Robert Ryan, two lawyers who had been chasing Citicorp since 1978. Fedders heard them out, but he was unimpressed—he thought von Stein and Ryan had failed to prove that Citicorp had done anything illegal, and he told them so. Fedders wanted to shut the case down.

  In the end he hadn’t done it, though. So far, Doherty had managed only to convince Fedders that if he killed the Citicorp case peremptorily, without allowing the commissioners to vote, he would badly alienate his staff. Fedders had compromised because he was having enough trouble winning the hearts and minds of the enforcement division lawyers who had worked so many years at the commission before his arrival. The Citicorp dispute had come just as he was beginning to gain ground. For one thing, he was starting to recruit his own people to the division from private practice—young, well-dressed, well-trained lawyers from private practice, “the preppies,” as they were sometimes called derisively by the more motley veterans. Also, the successful campaign against insider trading was stirring some enthusiasm in the division. But the Citicorp case presented Fedders—and Shad, too—with a potentially dangerous pitfall. Fedders decided to allow Doherty and the others to present their own memo to the four commissioners, recommending charges against Citicorp. At the top of the memo, Fedders included his own recommendation that no charges be brought against the bank. It would be up to Shad and the other commissioners to choose between the conflicting recommendations of Fedders and Doherty. That was why the commissioners and staff had gathered in the closed meeting room three days before Christmas, in an atmosphere of considerable tension.

  “I perceive,” David Doherty declared as the discussion got under way, “that I may have a slight uphill battle on this one.”

  A bevy of memos describing the competing positions had already been drafted and circulated to the four commissioners who would consider the case. One SEC commissioner, Barbara Thomas, had removed herself from voting on the matter because business dealings she’d had with Citicorp before she was appointed to the SEC cre
ated the appearance of a conflict of interest.

  “I’d like to compliment you, John Fedders, for the decision that you made to bring this to the commission,” Shad said from his perch at the center of the table, reminding his fellow commissioners that a less magnanimous enforcement director might have killed the matter on his own. To Doherty, Shad added, “I’d like to compliment you for the courage and the conviction to go against the viewpoint of the other divisions and the integrity of your viewpoint.”

  Shad, too, was campaigning to win hearts and minds at the commission, and, like Fedders, he was beginning to succeed. His deregulatory campaign was in full swing. The deal he struck with Philip Johnson, the chairman of the Commodity Futures Trading Commission, to free new stock-index-futures products from their regulatory quagmire had progressed well. Other efforts to make the commission’s regulations simpler and more efficient were under way. Shad had thrown the weight of his office behind plans to simplify the process by which corporations filed annual reports and other statements at the SEC—Shad thought the changes he was pushing would save the country billions of dollars by helping companies raise money quickly in the stock and bond markets, without unnecessary delays caused by the commission. The most controversial change Shad was backing that winter was known as rule 415, the “shelf registration” rule, which would allow companies to avoid repetitious disclosures of the financial aspects of their business operations each time they tried to raise money in the stock and bond markets. Critics warned that the proposed rule would allow big companies to hide problems from stockholders and investors. Shad disagreed, and his enthusiasm for the change had impressed some of the SEC staff wary of his Wall Street background—the big Wall Street investment houses, such as the one where Shad had spent his career, opposed the rule change because it would cut into one of their lucrative businesses. But Shad hadn’t bowed to any pressure from Wall Street, at least so far.