Eagle on the Street

by Coll, Steve; Vise, David A. ;

  “I’m the only person in this room who has read all the documents, and I’m telling you,” von Stein said ardently.

  Fedders cut in. “I’ve reviewed the case and I stand by what I said.”

  “You said that with a little more work you could probably show that they were illegal,” challenged Evans, joining von Stein.

  “A hell of a lot more work.… We don’t have any evidence to prove illegality,” said Fedders. “… We could not go in court tomorrow and establish this case.”

  “On that basis, I concur with the other two commissioners,” Shad said, putting an end to it.

  “Thank you very much,” he added. And with that, the meeting was dismissed.

  That wintry week the hallways and offices of the North Capitol Street headquarters emptied as Shad, Longstreth, and the others headed off to spend the Christmas holidays with their families. Shad wasn’t one to gloat, but the flush of victory in such a difficult and deeply felt debate could hardly fail to make an impression on such a competitive man. He was winning now. The old was on the way out, the new was on the way in; it was that season of the year. Within months Doherty would be gone from the SEC, joining his old mentor Sporkin at the CIA. Some of the other holdovers would be leaving soon, too. There was every reason for Shad to believe that the new year would bring with it new momentum, an acceleration of his deregulatory program and consolidation of his influence inside the SEC.

  There was every reason for optimism.

  5

  The Hunted

  From an anteroom off a cavernous marble hallway, Jack Shad and his two counselors from the Securities and Exchange Commission crossed into a vast inner office. One of them lugged a box filled with confidential documents. They were supplicants on a political pilgrimage—the box was a kind of offering. On a winter’s day early in 1982, Shad and his staff lawyers had been summoned to the second floor of the Rayburn House office building by Congressman John D. Dingell, Democrat of Michigan, the chairman of the House Energy and Commerce Committee, whose responsibilities included oversight of Wall Street and the SEC.

  Trophies rimmed the walls—Dingell was a hunter, and he had mounted the heads of caribou, wild boar, and rare white deer. The first time he saw the place, Shad was struck by the political metaphor of the congressman’s interior decoration, and a frightful, impish idea jumped into his head. He imagined his own head stuffed and mounted on a wooden plaque, hoisted right up there between the animals. He said something along those lines and Dingell laughed. At least he had a sense of humor. Once Shad found himself seated next to Big John, as the six-foot three-inch, two-hundred-twenty-pound congressman was known on Capitol Hill, and Dingell started talking about what it was like to hunt in the Michigan woods in winter. Dingell said he wore a white hunting suit as camouflage and stalked his prey through thick foliage draped in blinding white snow. As he listened Shad visualized Dingell tromping through the woods, all but invisible, with a big bull’s-eye around him formed by a flock of dead crows. It was hard to say what Shad’s vision meant, but if there was a dreamlike intensity to the way he thought about Dingell, it was because the congressman loomed large in Shad’s life.

  Dingell was always lamenting what he saw as the culture of greed on Wall Street, and he demanded that the SEC protect ordinary investors from crooked stockbrokers and the economy from sophisticated financial corruption. When he talked about Wall Street and the SEC, Dingell sounded like a prairie populist, a righteous defender of the little people against the clutches of corporate excess. The irony was that there were few congressmen of either party in Washington more beholden to big business than Dingell. His father had been a congressman before him, and Dingell knew intimately the importance of protecting hometown constituents—as it happened, Dingell’s suburban Detroit district was home to the headquarters of the Ford Motor Company, one of the world’s largest automobile manufacturers. Thanks largely to Dingell’s support as chairman of the powerful Energy and Commerce Committee, Ford and its brethren automakers had successfully fought off a litany of consumer-backed reforms of the industry. Laws to require airbags in cars, to toughen auto-safety standards, and to reduce air pollution by limiting carbon dioxide emissions in auto exhaust, all were blocked by Dingell. Unfortunately for Shad, any ideological inconsistency between Dingell’s genuflection to Detroit and his populist support for the SEC mattered little in the capital. What mattered was that Dingell chaired a powerful committee, and that he was virtually unbeatable at reelection.

  For Shad, an unhappy phase in his tenure as chairman of the SEC began that day early in 1982, when he and two top commission aides arrived in Dingell’s office with their box of documents. Dingell had contacted Shad to say that he was about to launch a congressional investigation into Shad’s personal finances. Staff members on Dingell’s oversight and investigations subcommittee thought they smelled something improper in the stock transactions through which Shad began to sell his more than $10 million fortune in E. F. Hutton shares before leaving Wall Street for the commission. Shad didn’t know why Dingell’s staff was suspicious. He had heard that lawyers at the oversight subcommittee simply couldn’t believe that he would willingly pay the $2.5 million in capital gains taxes due the U.S. Treasury upon sale of the stock—the congressional lawyers were going to see if he had secretly “parked” his Hutton shares, hiding them temporarily and planning to get them back later. On the other hand, there might be another, more obvious explanation for the probe: partisan politics. Ronald Reagan’s conservative revolution was sweeping the capital, but Dingell had launched a one-man counterattack.

  Shad handed over his box, which contained a pile of confidential, personal financial records documenting his holdings and stock trades. Shad also gave Dingell a copy of a letter that had been drafted by the commission’s ethics counsel. The ethic’s counsel’s job was to make sure that SEC staff and commissioners didn’t violate any of the Byzantine laws proscribing conflicts of interest by government officials, and also to discipline staff who leaked secret commission information to the public. The letter said that Shad had complied with both the letter and the spirit of the relevant laws. He was selling his Hutton stock; he had established a blind trust for his fortune, managed by his old friend Barton Biggs at the Wall Street investment firm Morgan Stanley & Company; and he had avoided participating in SEC decisions when there might be a question of financial conflict of interest.

  Shad said he wanted this wrapped up as promptly as possible. When it was over, if Dingell hadn’t found anything improper, he also wanted a letter of exoneration.

  Dingell said that Shad would be treated fairly.

  There was another thing: Shad said emphatically that he didn’t want any of this to be leaked to the press, a tactic that he surmised was commonplace among congressional committees, particularly those run by Dingell. The very fact of an ongoing investigation, if it were publicized, would unfairly imply wrongdoing and tarnish his reputation, Shad said.

  There won’t be any leaks, Dingell responded.

  Perhaps Dingell meant what he said. It was hard to know sometimes how much of what happened in Dingell’s name was personally approved by him, and how much represented the independent work of his large staff. Dingell usually accepted responsibility for what they did, and certainly he basked happily in the publicity they generated. There were more than a hundred people on the congressman’s payroll, at least a dozen of them full-time investigators whose work often found its way into the pages of the country’s largest daily newspapers. At the libel trial between Mobil and the Washington Post that involved the SEC’s probe of the oil company, one of Dingell’s investigators testified that he routinely leaked information to reporters as part of his effort to win notice for Dingell’s committee. Reporters, at least those who didn’t feel too ashamed of themselves, competed ferociously for Dingell’s leaks—the staff investigators’ work was often thorough and genuinely newsworthy. But the targets of Dingell’s probes—Republican government officials, de
fense contractors, and businessmen—often felt they were victims of politically motivated, calculated campaigns of character assassination.

  John Shad felt that way on March 18, not long after the meeting with Dingell, when he awoke to find a headline splashed across the pages of the New York Times’s business section: MORGAN STANLEY’S LINK TO SEC CHIEF STUDIED. The story, by the investigative reporter Jeff Gerth, cited “congressional sources” as saying that Shad had been asked to turn over documents to Dingell’s oversight subcommittee, and that the committee was probing possible improprieties in the SEC chairman’s stock dealings. Gerth reported that Dingell was investigating whether Shad’s financial ties to Morgan Stanley might influence his consideration of the proposed SEC rule known as 415, which would affect the Wall Street firm’s business if adopted. By simplifying procedures for public companies to file financial disclosure documents at the SEC when they sold new securities to investors, 415 could cut into Morgan Stanley’s and other Wall Street firms underwriting and financial-advisory fees. Shad backed 415 wholeheartedly, so it was hard to see where he might be influenced by Morgan Stanley. Shad was convinced, too, that key facts about his financial dealings with Morgan Stanley—facts that would have demonstrated he had no conflict of interest—were deliberately left out of the story. The story questioned whether Shad improperly had joined the other four SEC commissioners in voting to implement the new rule on a one-year trial basis only—partly because of howls of protest from the Wall Street firms. The story questioned whether Shad might have accepted the one-year compromise because of his relationship with Morgan Stanley, and there were questions, too, about the adequacy of Shad’s financial disclosures.

  Furious, Shad tromped over to Capitol Hill and met again with Dingell, beneath the stuffed animal heads on the second floor of the Rayburn building.

  You leaked this story to Gerth, Shad charged.

  Dingell denied that he had done any such thing. Pressed by Shad, a member of Dingell’s staff acknowledged that he talked sometimes with Gerth, but he, too, denied that he was the initial source of the reporter’s story. There was nothing else Shad could do. After another talk about fairness and confidentiality, he retreated to his office at SEC headquarters.

  The press was driving Shad to distraction that winter. Apart from Big John Dingell, if there was anyone in the capital whom Shad had come to view as his personal nemesis, it was New York Times reporter Jeff Gerth. It had started during his first weeks on the job, back in the summer of 1981, when Gerth had come to visit Shad at the SEC for an interview. Shad talked about the changes he hoped to implement at the commission—he said that he wanted, among other things, to make it easier for companies filing financial statements and annual reports at the SEC to write in language ordinary investors could comprehend. Too often, Shad told Gerth, it was the lawyers who wrote a company’s annual reports, and lawyers were such a cautious, even paranoid, lot that they overstated a company’s negative aspects while drowning the reader in qualified legal jargon. This was something Shad felt strongly about because developing corporate reports for investors had been one of his responsibilities in the corporate finance department at E. F. Hutton. After the interview, Gerth published a story that implied, Shad felt, that the new SEC chairman only wanted “happy news” in corporate reports, as if he were some bimbo television news director bent on relieving his audience from the gloom of truth. Shad was livid—Gerth had “bagged” him, he told anyone who would listen. Ever since, he had been fuming about Gerth’s reporting about the SEC.

  Then, in February of 1982, Shad felt he got bagged by Gerth again, this time with even more devastating effect. On the front page of the Times appeared a long story describing how the SEC had decided, after a long investigation, not to file securities fraud charges against Citicorp over the banking company’s questionable dealings in the foreign currency markets. The story rocked the SEC—rarely did newspaper stories describe decisions made at closed commission meetings. From his reading of Gerth’s story, Shad thought the leak had come at least in part from Dingell’s oversight committee, which could have learned of the probe from a disgruntled attorney in the SEC’s enforcement division. Dingell threatened to hold public hearings to investigate why the SEC had not acted. Such hearings would help the Democrats in Congress discredit the deregulatory approach championed by Shad.

  Now, on top of all this, there was Gerth’s story in March, which used the “news” of Dingell’s investigation of Shad’s finances to raise questions about the SEC chairman’s personal stock dealings and the adequacy of his disclosures under government ethics laws. The questions and accusations about him were rising to a crescendo; one story justified another, and then another. In an attempt to respond, Shad paid $70,000 to Joseph Califano, the former Health, Education, and Welfare secretary, for public relations and legal advice. Perhaps Califano worked hard for such a steep fee, but in the immediate aftermath of the Times stories none of it seemed to do much good.

  Competition between the newspapers only intensified the drive for information about Shad’s dealings, and new stories appeared. The Times found that since his appointment as SEC chairman, Shad had donated $1,000 to Senator Alfonse D’Amato, a Republican from New York, who sat on the Senate committee responsible for SEC oversight. It was a measure of Shad’s naïveté about the ways of Washington that he couldn’t understand why this was news; he had always given money to Republican senators from New York, he said. In what Shad viewed as a “me too” effort by the competition to catch up, the Wall Street Journal also ran a front-page story calling Shad a “flabby cop” and reporting that lawyers and commission staff feared the SEC’s glory days were finished.

  When the newspapers failed to provide what Shad considered adequate space for his defense, he sent a letter to the editor. He also demanded an audience with Gerth’s superiors. Some of Shad’s colleagues in the Reagan administration—the ones who had served in the previous Republican administrations of Nixon and Ford—might have told him to relax, to keep things in perspective, that this was how politics was played in the capital. The best approach was to go easy, be careful about how your words and deeds might appear in public, and keep an eye out for compromise.

  But that wasn’t Shad’s way. Though the SEC never responded to press inquiries or stories about its confidential investigations, except to say that it would neither confirm nor deny the existence of a probe, Shad decided to make an exception in the Citicorp case. It was painful for him to watch from the sidelines as he and the agency got battered in the press. The SEC issued a public statement on March 5, 1982, explaining its decision not to press charges or take any other action against Citicorp.

  “Certain members of the enforcement staff believed that Citicorp violated the commission’s disclosure rules,” the SEC statement said. “However, the Director of the Division of Enforcement, the Office of the General Counsel and the Division of Corporation Finance were of a contrary opinion.”

  The SEC listed reasons justifying its decision—the allegations weren’t proven, and even if they had been, the case was outside the commission’s jurisdiction. Then the SEC lashed out at the newspaper stories that prompted this extraordinary public statement in the first place.

  “The illegal disclosure to the press of confidential commission proceedings is also a serious cause of concern,” the SEC said. “It violated the rights and interests of private parties, inhibits the commission’s ability to obtain essential cooperation of the private sector in its investigations and undermines the candid debate of critical issues by members of the commission and the staff necessary to well-considered decisions. It is for these reasons that the commission normally does not comment on actions not brought.

  “In view of the distorted impressions created by statements in the press, the commission would welcome the opportunity to provide a full account of its handling of the Citicorp matter before an appropriate Congressional committee.”

  On Wall Street, when Shad had a problem, he ha
d dealt with it head on, without shrinking or shirking. That was how he was going to handle things in Washington, too. He thought that he and the SEC were being unfairly lumped in with all the sleazy scandals and conflict of interest probes that made Washington seem morally bankrupt to those who earned their livings outside the Beltway.

  Shad was outraged. He wasn’t going to play by the capital’s rules—he was going to fight.

  Jack Shad had been warned.

  Not long after he arrived in Washington, Dingell had joined him for lunch at the Monocle, the Capitol Hill watering hole where Shad cut his stock futures deal with Philip Johnson. Dingell wanted to explain how things were going to work. He wanted Shad to understand that while all of Washington might be excited about the Reagan triumph, and the chance to streamline the bureaucracies and establish new priorities of deregulation, he, Dingell, wasn’t going to let that happen at the commission. The Senate was in the hands of Republicans, so the Senate committee overseeing the SEC was unlikely to be aggressive. Dingell intended to take up the slack in the Democratically controlled House of Representatives. There was too much history at the SEC, he said. He wasn’t going to allow all of what had been accomplished to be undone.

  I’m tough, Dingell said, but you’ll know where I’m coming from. I won’t sandbag you, but I’ll stick to my guns.

  It was at that lunch that the rules of the hunt seem to have been explained. But what was Shad supposed to do—run off into the woods and hide?

  He respected Dingell’s “machismo” and blunt resolve; Shad used to say that if he ever had to fight in a trench war, “Rambo” Dingell was the sort of guy he’d like to have at his side. But it irked Shad that Dingell could be so affable in private—at meetings in the congressman’s office or over lunch at the Monocle—and then so brutal and partisan in public. Shad’s legislative director at the SEC, Ethel Geisinger, a young Republican who had worked as an aide to the Senate banking committee before joining the commission, tried to explain that Washington not only tolerated such hypocrisy, the capital thrived on it. Everybody had a job to do, a role to play in front of the television cameras. But that didn’t preclude public enemies from developing private friendships. No matter how hard she tried, though, Geisinger couldn’t persuade Shad to accept such duplicity as the ordinary course of business.