Eagle on the Street

  There was another way that Shad was ingratiating himself with the SEC bureaucracy—it was evident in the way he complimented Doherty for his “courage and conviction,” even though Shad evidently disagreed with him about the Citicorp case. From the beginning the staff had wondered how Shad’s obviously ambivalent attitude toward the SEC—on the one hand he distrusted the bureaucracy, but on the other he respected its mission and aspired to leadership—would be expressed at closed meetings, where the commission’s serious business was conducted. (SEC meetings to which the public was invited were called open meetings; the public was barred from closed meetings.) What they had learned in the preceding five months was that while Shad held strong opinions about how the SEC should change its ways, he also wanted to work within the system, and he craved collegiality and respect. Before Shad’s arrival, some closed SEC meetings erupted into emotional name-calling sessions. Shad put a stop to that immediately, setting a more formal tone by addressing division directors by their “Director” title and insisting on a professional decorum. Shad didn’t go in for Machiavellian politicking or intrigue. He said what he meant and he was used to getting what he wanted. On Wall Street they said Shad was the sort of investment banker who didn’t mind leading with his chin.

  A few of the senior commission staff understood something Shad didn’t, though, something they thought he would learn soon enough. To someone like the new SEC chairman, who was uninitiated in the ways of Washington, it was hard to explain in so many words, but it had to do with the ends of power and the means of its exercise. You could put it this way: In the nation’s capital, if a man led with his chin, there was usually someone around ready to throw a sucker punch.

  “I would like to take a few minutes and lay out where we are and what our position is and, hopefully, in the process, simplify what is a pretty complex situation,” Doherty began when everyone was settled at the commission table.

  The spools of a tape recorder turned silently nearby. The law required it—no one from outside the SEC attended closed meetings, but if there ever was a question about what went on, Congress could ask for the tapes. They were stored securely at commission headquarters and eventually shipped to a storage facility in suburban Maryland. It was only in the 1970s that the practice of taping meetings had begun, in the aftermath, ironically, of the Watergate scandal.

  Doherty summarized the facts of the Citicorp case.

  The whole thing had begun, as many SEC proceedings did, with a complaint from someone who thought the commission could help him. A junior official at Citicorp named David Edwards, distressed by what he thought were improper dealings by the bank, hired a lawyer and arranged to meet with the SEC’s enforcement staff in Washington. He brought with him documents that appeared to show a deliberate scheme by the bank’s currency-trading department to evade tax and currency-exchange laws in a number of countries, mostly in Europe. The bank bought and sold millions of U.S. dollars, British sterling, French and Swiss francs, German deutsche marks, and Italian lira every day. To avoid paying taxes and to escape restrictions on currency speculation, the bank allegedly arranged bogus deals with subsidiaries in island tax havens like the Bahamas. The bogus deals were called parking transactions because the bank allegedly “parked” its money in the Bahamas for short periods of time to evade the law.

  “Our view is that Citicorp had a policy of parking that was known by management, and management was at least aware of the questionable legality of the practice,” Doherty told Shad and the other commissioners that December morning. “Indeed, Citicorp itself, in various memos, described the practice as transparent, rinky-dink, and artificial. So I think it was perceived within Citicorp as, at many levels, a highly questionable practice.”

  Edwards, the Citicorp whistleblower who got the SEC investigation started, was fired by the bank a week after he squealed to the commission, Doherty continued. Meanwhile, Citicorp retained a prestigious Manhattan law firm, Sherman & Sterling, to conduct an internal investigation of the bank’s currency trading practices. The law firm produced a carefully worded report that purported to describe the bank’s practices and denied any wrongdoing. Sensitive to the precept that any questionable conduct by a corporation should be disclosed publicly in the SEC’s filing room, Citicorp filed the Sherman & Sterling report at the commission. But Doherty and the other enforcement lawyers felt the report was intended to deceive the public. “We believe this report is misleading,” Doherty said. “It basically indicated [the parking] was a sporadic, isolated kind of conduct. The impression it left is that Mr. Edwards was wrong in his allegations as opposed to being right.”

  For more than half an hour, Doherty went on without interruption. He talked passionately about how important it was that the SEC not change its policy of forcing big corporations like Citicorp to disclose fully their improper conduct to the public.

  In addition to Fedders, other senior commission staff opposed Doherty. Among the memos that had been submitted to Shad and the other commissioners prior to that day’s meetings was one from Jack Shinkle, the SEC’s associate general counsel. Shinkle’s office, called the counseling group, was supposed to express an opinion about every recommendation that went to the full commission from the enforcement division. (The group was formed under former chairman Harold Williams, who had used it as a check on enforcement chief Stanley Sporkin’s power.) The counseling group sometimes submitted legal briefs to the commissioners, opposing the enforcement division’s recommendations. In this matter, Shinkle argued that under certain provisions of the federal securities laws, the commission could only force a corporation to make corrective disclosures in the SEC’s public-filing room—the agency had no power to force a company to disclose something it had never mentioned in previous statements to investors. In other words, if a corporation said in its publicly filed annual report that it did business legally and honestly, and the SEC found out that it actually was crooked, then the commission could force the offender to correct its earlier public statement and admit its improper conduct. But if, on the other hand, a corporation never asserted publicly that it was honest in the first place, the SEC had no authority to force the company to admit that it was crooked.

  It was a strange logic, and Doherty was evidently outraged by it. Warming to his argument, he told the commissioners a story about how a few years back the enforcement division had found out that a publicly owned company in the scrap-metal business was deliberately short-weighting its shipments to customers. When a customer bought a hundred tons of metal, Doherty said, the company loaded only seventy-five tons into its trucks, and made up the difference with bricks and stones. To avoid discovery when the trucks were unloaded, it paid bribes to the customer’s receiving agent. “My reading of the general counsel’s office theory … is that you could not charge a violation … under those circumstances because there’s no affirmative representation in the annual report that management was honest, that books and records were honest, that they were conducting their business in an honest manner.… I would urge the commission not to take such a restrictive point of view.”

  In Doherty’s long speech he kept drifting away from the details and toward broader, more emotional themes. They kept letting him talk, never asking questions, never challenging him, as if they were politely indulging him before delivering the hard truth that the view of the SEC’s role that Doherty was articulating no longer would prevail.

  “We can’t prove this case,” Fedders declared when his deputy was done. “We have no ability to establish today that the conduct engaged in by Citicorp was illegal. We have circumstantial evidence; we have evidence that tends to indicate that there may have been improper conduct. But we could not walk into an administrative proceeding or to a court today and establish this case, that there was illegal conduct.”

  Later, Fedders considered this to be one of his finest hours at the SEC. He had been on the job only months, he faced resentments and suspicions and management challenges, yet he had stuck to th
e facts and he had given Doherty and the others beneath him in the enforcement division a chance to make their case before the commissioners. Fedders prided himself on his “intellectual honesty,” by which he meant rigorous attention to the facts and to the letter of the law. Attorneys like Doherty, in Fedders’s view, were intellectually dishonest because they stretched the federal securities statutes and the SEC’s powers to suit their needs. Shad shared this basic view about enforcement. In the Citicorp case, Shad thought not only that the enforcement staff had failed to prove any illegality, but also that it had delayed far too long in bringing its proposed fraud charges to the commission table.

  “May I ask, why wasn’t it brought before now?” Shad inquired. “Why this extraordinary delay?”

  “Let me answer that,” said Robert Ryan, the enforcement staffer who reported to Doherty and who had devoted nearly three years of his life to the Citicorp investigation. Ryan could see that the meeting was going against him and he sounded frustrated. “Number one, the first delay was the commission. The commission told us to wait until Sherman and Sterling filed their report.”

  “Well, but that was in seventy-eight,” Shad said.

  “That was the first delay, sir. The second delay was Sherman and Sterling and Citicorp in delaying getting documents to us and arranging witnesses. Third, the complexity of the case; and fourth, quite frankly, disagreement among the staff as to the scope of the case.”

  “Well, but how much of—let me characterize it baldly. How much of the delay was due to stalling or dilatory tactics by Citicorp?” Shad pressed. “Where did that end up?”

  “I can’t break it down and talk to that.”

  “It certainly hasn’t been going on for three years.”

  Shad planned to vote against filing any fraud charges against Citicorp. The question was whether Doherty and Ryan could win at least two votes from the remaining three commissioners, thus forcing a 2 to 2 deadlock. In that event, there were certain procedures by which a tie might be broken, but the procedures were little used and it wasn’t at all clear what would happen. Throughout its history the commission had not been an adversarial body; the majority of its votes were unanimous and usually followed the recommendations of staff. If there was a tie, certainly there would be a new round of discussions and arguments, and perhaps one of the commissioners would change his or her mind. But from whom could Doherty win two votes?

  Under federal law, two of the commission’s seats were reserved for Democrats and two for Republicans. The president appointed the chairman, and so a majority of commissioners at any given time belonged to the president’s political party. But when John Shad arrived at the SEC, party affiliation was not a significant factor with the commissioners; it was the ideology of Stanley Sporkin, not the ideology of Republicans and Democrats, that divided the members of the SEC. When the SEC staff in the room that day looked at the three commissioners who flanked Shad, they could sort them most easily in terms of their attitudes toward the enforcement program. Phil Loomis, a Republican, had spent time on the commission staff and respected Sporkin and his enforcement division, but lately Loomis had grown increasingly resistant to the enforcement division’s expansive policies. John Evans, a Republican appointee of Nixon, was Sporkin’s great defender on the eighth floor, the one commissioner who had consistently opposed the changes being pushed by Shad, Fedders, and the others. The swing vote belonged to Bevis Longstreth, a recently appointed Democrat whose views were largely unknown. Longstreth was a Manhattan attorney who specialized in bankruptcy law during his long career.

  “I agree that what Citicorp did here was questionable,” Loomis began, when it came time for the commissioners to air their views. “Perhaps, probably, it did involve, technically, an evasion of the rules with respect to the amount of the currency they held overnight. But, on the other hand, there are the arguments that Mr. Fedders makes, which I think are quite forceful.… It’s not really a securities case; it’s a foreign currency case, and a banking case, and in view of the fact that there are difficulties of proof and other factors, I quite agree with Mr. Fedders, in the exercise of discretion, not to bring this.”

  That made it two votes to none against Doherty and the staff.

  “Commissioner Evans?” Shad said.

  “I find this a very difficult case,” he responded.

  Evans began to talk about the facts, the amount of money involved, the foreign tax and currency laws in question. But as he went on, as had happened to Doherty, Evans glided into sweeping, emotional themes—a defense of a vigorous, activist SEC, one whose enforcement division provided deterrence against crime in the boardrooms and executive suites of the country’s largest financial institutions. Evans thought that Fedders had a point about the Citicorp case—the amount of money involved was relatively small compared to the bank’s revenue, and the case was certainly old. But there was another issue that Evans thought was more important. Fedders seemed to be saying that if you’re big enough, and if you keep your illegal conduct on a well-managed scale, then the commission will never be able to prove a specific case. Evans thought this was a dangerous development. If you stopped holding Wall Street and executives at the country’s largest corporations responsible for the little things that went wrong in their organizations, then soon enough the top people would start to look the other way when bigger problems arose.

  “I think it’s appropriate that people understand that the commission expects them to adequately disclose transactions of this type,” he said. “And just because it’s the largest bank in the United States or the largest bank dealing in foreign currency transactions in the world doesn’t mean that this is not … in my opinion, doesn’t mean that this is not material.

  “I think it means that the commission should be willing to take on a responsibility of adequate disclosure even in a case where you have the largest institution in the world. If we don’t, who will?”

  With that flourish, Evans said that he thought the SEC should file charges against Citicorp.

  Eyes in the room shifted to Bevis Longstreth, the former bankruptcy lawyer who now held the decisive vote.

  Longstreth had much in common with Shad. He commuted between Washington and New York, spending the week at a rented basement apartment in Georgetown and the weekends at his spacious Manhattan flat. Longstreth differed with Shad on some economic and ideological issues, but they were fast becoming friends, brought together in Georgetown by the tragedy of Pat Shad’s stroke and by a streak of giddy playfulness they shared. Shad kiddingly referred to Longstreth’s basement apartment as a “den of iniquity” because of all the attractive coeds and professional women who walked the neighborhood streets. Some nights after work, Shad and Longstreth would eat sushi together at a Japanese restaurant on Wisconsin Avenue. Occasionally, they wandered over to the Little Tavern hamburger stand on Wisconsin and poured quarters into a Pac-Man videogame machine at the back of the restaurant. Shad had grown enthusiastic about Pac-Man—he liked the game’s geometric and mathematical aspects, especially the fact that he could keep track of his score, measuring his improvement in numbers. He drew Longstreth into a running competition in which they wagered on the outcome of Pac-Man games, with Shad often spotting Longstreth the number of points by which he had beaten him in the previous game. Sometimes Shad’s prowess at the game would drive Longstreth into debt until he could win a match and bring the account back to zero on a double-or-nothing bet.

  “I share the agonies around the table,” Longstreth said that morning, “because it is a tough case, an awfully tough case. I guess my bottom line is that, in the exercise of prosecutorial discretion, I guess I wouldn’t bring the case.”

  “Would not?” Shad asked.

  “I think it’s very hard for the SEC to prove that [Citicorp was] wrong, at least in a case as fuzzy as this.”

  The vote was finished—Shad and Fedders had prevailed at the commission table, 3 to 1, with Shad joining the majority. There would be no charges against
Citicorp.

  The enforcement lawyers were deeply disappointed. They had given three years of their lives to this case; lived it, sweated it. During the investigation, they hadn’t thought there was much chance that it would come to nothing; the only question was how big a case it would be when the charges were finally filed. Tom von Stein, the staff lawyer who had worked hardest on the investigation and who sat silently through most of the meeting that day, couldn’t let it drop. The commissioners, except for Evans, had all sounded so reasonable, so devoid of commitment, as if proposed fraud charges against one of the world’s biggest banks were somehow a routine matter.

  “The evidence is there,” von Stein broke in dramatically. “There are hundreds of documents which describe the practice.”

  “The evidence is arguably there,” Shad answered him. “In your view it’s there, and in the opinion of the other two divisions, it’s questionable.” Shad was talking about the memos submitted by the SEC’s Office of the General Counsel and the Division of Corporation Finance, which regulated filings at the commission by publicly owned corporations, including Citicorp. Both memos supported the view of Shad and Fedders that the Citicorp case should be dropped.