Eagle on the Street

  That winter of 1982, when he was having so many public difficulties, Shad kept asking Geisinger to arrange lunches with the congressmen and senators who were giving him the hardest time, whether over the budget, deregulation, or his personal finances. They would meet in a private dining room on the Hill, or downtown at the Metropolitan Club, mano a mano, with no staff allowed. Afterward, Shad would walk beaming into Geisinger’s office, declaring the session a great success.

  “I think I have an understanding with him now,” Shad would say.

  And then, the next day or the next week, when the SEC chairman was summoned back to Capitol Hill for another public hearing—bam, the same congressman or senator would tear into him with great ferocity, accusing Shad of all variety of transgressions. In the car afterward, on the way back to SEC headquarters, Shad sometimes railed emotionally against those who had attacked him at the hearing. He would say that he couldn’t understand how they could treat him like that, after all that had been said in private. For their part, the congressmen felt so much strain at the lunches with Shad that after a while Geisinger had trouble getting anybody to accept the chairman’s invitations.

  There were times when Dingell, especially, was just as intimidating behind closed doors as he was in public. During the first round of budget battles late in 1981, Shad publicly supported the Reagan administration’s plan to reduce the SEC’s personnel by 6 percent. With its budget of about $80 million and its approximately 2,000 employees, the SEC was a small agency by federal government standards. The commission also was ostensibly an independent law-enforcement agency, but as a loyal Reagan team player Shad felt obliged to defend the president’s budget with enthusiasm. He charged up to the Hill with an eighteen-page memo drafted by the SEC’s executive director’s office, which handled the commission’s budget, administrative, and personnel matters. The memo explained how the commission could do its job with fewer resources—by increasing productivity, the SEC could maintain its programs while implementing the 6 percent personnel reduction.

  But the Democrats would have none of it. Congressman Tim Wirth, chairman of a key Dingell subcommittee, publicly ridiculed Shad’s notion, which he said amounted to an assertion that the SEC could do more with less. Wirth and Dingell summoned the SEC chairman to a private meeting in the basement of the Rayburn building, where Dingell made it clear in no uncertain terms that Shad was not going to get away with reducing the commission’s budget. Wirth recalled that Shad was “almost shaking” when Dingell’s lecture was finished.

  And in public, Shad’s lack of political finesse undermined his cause even further. Several of his fellow commissioners, including Democrats Barbara Thomas and Bevis Longstreth, disagreed with Shad’s position on the budget—Thomas warned that proposed budget cuts would “cripple the commission.” At a key hearing on Capitol Hill, Shad allowed the dissenting commissioners to voice their opinions after he delivered his official testimony, cementing the impression that the SEC was divided within itself over Reagan’s proposals. Shad’s political advisers had warned him to avoid such an appearance, but the chairman seemed not to understand the impression split testimony would make on congressmen and the media.

  Hearings on the Hill terrified Shad, which was unfortunate, since there were a lot of them. He grew preoccupied with his preparations—he thought of the hearings as final exams, and he was determined to cram. Nobody in the hearing room was going to know more about the topic at hand than Shad. Perhaps he thought such encyclopedic knowledge would make up for the discomfort he obviously felt when speaking in public, but in truth it only seemed to make him more tense. When a hearing approached, Shad kept his staff at SEC headquarters late into the night, rehearsing questions and answers, pouring over briefing books, struggling to write and rewrite his opening statement. Shad thought the rehearsals were critically important. Once, during a particularly touchy legislative fight concerning the SEC, Ethel Geisinger recommended that Shad place personal phone calls to a number of key congressmen in an effort to influence their votes. Shad was so uncomfortable that he insisted she rehearse the calls, with Geisinger playing the congressmen and Shad playing himself. Still, though he worked hard, his performance didn’t improve.

  Shad took the worst shellackings when his drive to implement broad changes at the SEC ran afoul of Dingell. One of Shad’s projects during his time at the commission was an attempt to establish a new, electronic filing system that would cut down on the massive amount of paper processed by the SEC. The $10 million electronic system was known as EDGAR—Electronic Data Gathering and Retrieval—and Shad launched into it with typical insistence and enthusiasm. It made perfect sense to Shad that, in the computer age, public companies should stop delivering reams of paper to the SEC, and start filing their financial statements electronically. But he made a characteristic mistake—he forgot to consult with Dingell and make the congressman’s staff appear to be an integral part of the project’s planning. When EDGAR reached the pilot stage, Dingell’s staff attacked. They commissioned studies to show that the SEC was rushing too fast, that Shad was wasting taxpayer dollars by choosing the wrong technologies. On relatively short notice, Shad and his staff were summoned to Dingell’s hearing room in the Rayburn building for a public discussion of the project.

  That morning, Shad sat at the back of the hearing room as Dingell and the other Democrats on his committee tore into the SEC staff lawyers responsible for EDGAR, accusing them of incompetence and poor judgment. Shad fumed—he detested these media events, where the Democrats mugged for the cameras and embarrassed his commission. And the hearing that day struck him as especially unfair. None of the Republicans on Dingell’s committee were present; it was strictly a partisan attack. By the time it was Shad’s turn to sit before the microphones, lights in his eyes and a cigarette at hand, he was steaming.

  “I came with a prepared opening statement,” Shad told Dingell. “But having heard the testimony this morning I would like to make some preliminary observations.… Mr. Chairman, I know how strongly you feel about treating people fairly—in fact, bending over backward. But these hearings have not been fair to the people that have been subject to this cross-examination, particularly members of the staff that have just been on the stand. First of all, these hearings are not bipartisan. There are no Republicans present. But neither are the hearings objective.”

  Dingell was outraged—he would not stand for Shad’s impertinence. “It is not for you to complain about whether these are bipartisan. These hearings are being held in full conformity to the rules of the House, and I will interpret those for your benefit as opposed to your interpreting them for mine.”

  “Well, I appreciate that. You are much better qualified than I am.”

  “We will proceed more comfortably once you recognize that.”

  It was the same point Dingell had made back at the Monocle, during Shad’s first weeks in Washington. The SEC chairman would be much better off if he would just play by Dingell’s rules. But Shad wasn’t listening. He carried on as if Dingell hadn’t said anything.

  “As I understand it, there is an issue about the composition of the committee—”

  “Mr. Shad, that is not any of your business. That is a matter for the decision by the members of this committee and not for the SEC.”

  “Well, all right.”

  “You have a broad writ at that institution, but it does not go to the composition of this committee, and you are so informed.”

  “Thank you.” But Shad would not stop. He didn’t seem to understand that he was hurting himself.

  “Nor do I think these hearings have been objective,” he went on. “I do not think these have been objective or unbiased.”

  “I am curious about how hearing from your staff shows a lack of objectivity,” Dingell inquired sarcastically.

  “The case,” Shad answered; “if you want to call it the case for the prosecution—”

  “There is no prosecution here, this is a committee which is inquiring
into your conduct of the public business.”

  “Somebody is laughing in the background on that comment,” Shad said with a touch of bitterness.

  The quip was a rare score for the SEC chairman, but overall, the hearings went badly for him. It was Dingell who controlled the podium, the witness list, and the agenda—Shad was merely a player in the congressman’s drama. There were those of Shad’s rank in government who, in similar circumstances, managed to relax and speak their lines. Shad never could, and when he did speak at hearings, he mumbled as though he had a mouth full of marbles. Most of the SEC staff found their chairman’s political naïveté charming, if occasionally frustrating. It was part of what made him accessible, vulnerable.

  Surely Dingell, too, understood that Shad was overmatched, but it was hard to tell whether the congressman ever felt much sympathy for his prey. As 1982 wore on, and the questions and controversy about Shad’s personal finances and his drive to change the SEC’s philosophy and rules mounted, Dingell and his allies in Congress pushed harder and harder.

  One way they pushed was by gathering information. Staff lawyers who worked for Dingell and for the Senate banking committee talked regularly with attorneys in the SEC’s enforcement division. Dramatic change was under way in the division because of Fedders, and resentment was building.

  As was true for frustrated citizens across the country, there remained a course of last resort—angry SEC staffers could always talk to their congressmen.

  By the late summer of 1982, the Citicorp matter had escalated into a public fiasco for Shad, Fedders, and others at the commission. After the Gerth stories about the 3 to 1 commission vote to kill the case, and after his congressional staff had poured over the relevant documents, Dingell had decided to tear into the matter. Fedders told his friends and allies at the SEC headquarters on North Capitol Street that Dingell’s staff, which included among its number a former enforcement staff lawyer who had clashed with Fedders, was out to destroy his public career and embarrass the Reagan administration at a crucial early juncture.

  There was reason to be concerned. In August, Bevis Longstreth, the Democrat whose vote in Citicorp’s favor had been decisive at the closed meeting, was excoriated at a Senate hearing because the New York law firm where Longstreth used to work had represented Citicorp, creating the appearance of a conflict of interest. Although he had said he would not vote on matters that presented conflict of interest problems, Longstreth had not disqualified himself from hearing the case. Longstreth protested that he personally had represented Citicorp only on rare occasions in the 1960s and mid-1970s, and that he had represented many clients whose interests were opposed to Citicorp’s. But Democrats on the Senate banking committee criticized him sharply. Of course, even if Longstreth had withdrawn from the case the vote would still have been 2 to 1 in Citicorp’s favor. Still, Longstreth was embarrassed by the hearing and he vowed privately not to let it happen again.

  Fedders, in the meantime, decided to counterattack. He realized that the only way a target of one of Dingell’s “investigative” hearings could defend himself effectively was to work within the committee, behind the scenes. Unlike Shad, Fedders wasn’t afraid to soil himself in the gamesmanship of realpolitik. When he heard that Dingell planned to call Sporkin, Doherty, and von Stein to testify, but would not allow rebuttal testimony from Fedders, the enforcement chief got in touch with some of the Republicans on Dingell’s committee. Minority members of the Energy and Commerce Committee often were stymied by Dingell’s intimidating rule; there was virtually nothing they could accomplish at the committee without Dingell’s approval. Fedders said that he needed help—here was a chance for the Republicans to make a splash at one of Dingell’s hearings. Working with Bob Whittaker, an obscure junior Republican from Eureka, Kansas, Fedders drafted a series of tough questions—drawing on his inside knowledge of the Citicorp case—that could be used to embarrass the former SEC lawyers who were scheduled to testify, including David Doherty, Stanley Sporkin, and Thomas von Stein, all of whom believed strongly that charges should have been filed in the case.

  Shortly after the proceedings began in Dingell’s brightly lit hearing room on September 13, 1982, Whittaker jumped in, interrupting Dingell with procedural points and pressing for a chance to conduct his own examination. Dingell put him off for a while and allowed Doherty and von Stein to describe damaging details about the way Citicorp conducted its foreign-currency-trading business. Finally, it was the minority side’s turn. Reciting in rapid-fire fashion the questions prepared with Fedders’s help, Whittaker, an optometrist by profession, sounded like a student reciting in proud tones a poem that he had recently memorized.

  “Mr. Doherty, is it correct that the commission’s Citicorp investigation took three and a half years to complete?… Mr. Doherty, in the course of the commission’s investigation, did Mr. von Stein prepare a lengthy report of his findings and conclusions?… Mr. Doherty, did you disagree with portions of Mr. von Stein’s report?… Mr. Doherty, was Mr. Fedders invited to testify here today?… Mr. Doherty, was it the commission’s responsibility to exercise the final judgment as to whether an enforcement action should be brought against Citicorp?… Mr. Doherty, do you have any reason to believe that the commission undertook and fulfilled its obligation in bad faith or with a lack of integrity?”

  The more Whittaker went on, the more obvious it became that he, like Dingell, had had help from inside the SEC. How else to explain that an eye doctor with less than four years’ experience in Congress could begin to quote, as Whittaker did, a host of obscure legal cases describing the standards by which SEC enforcement actions were filed? “Mr. Doherty, are you familiar with the 1976 decision of the U.S. Supreme Court in the case of TSC Industries, Inc. versus Northway, Inc.?” he asked. And a few minutes later: “I would assume then, you are familiar with the July 11, 1979, decision in the U.S. District Court for the Southern District of New York in the case of Amalgamated Clothing and Textile Workers versus J. P. Stevens and Co.?”

  Fedders considered Whittaker’s performance a rare and inspirational victory over Dingell’s unrelenting partisanship, and perhaps he was right. But the newspapers paid little attention to the Republican’s questions; their stories concentrated on Dingell’s charges that Citicorp had conducted itself improperly and that the SEC had failed to sanction the company. It might be fun to win from time to time, but the truth was that the sparring with Dingell too often seemed a demoralizing distraction from the commission’s business. So much time, so much worry went into the fight.

  And while Washington’s regulatory factions pummeled one another that fall of 1982, struggling for advantage in a contest of partisan politics, Wall Street was moving on to another game altogether. It might not have been obvious to John Dingell, or even to Fedders or Shad. But while they scrapped with one another in capital corridors and hearing rooms, the Manhattan financial district they were supposed to be regulating was whirling into a new orbit, beyond their control.

  6

  Trick or Treat

  Jack Hewitt had to know. That was the way he always approached investigations for the SEC. The only way to do the job was to find out as much as he could about people before he sat down to question them. He had to know personal details, not just where somebody worked and lived, but whom he spent time with on weekends, where he went on vacation, how he spent his money. Motivations, values, obsessions—it wasn’t easy trying to get inside somebody’s head, especially somebody he had never met before. But that was how Hewitt prepared.

  On the day before Halloween, 1982, Hewitt sat at a conference table seventeen floors above palm-tree-lined Wilshire Boulevard, a congested business thoroughfare that sliced thirty miles through the L.A. basin, from downtown to the sea. It was early on a Saturday morning, a languid hour in hazy southern California, but Hewitt was alert and intense. He was trying to assess the man across the table—in this case, a trim, reticent, dark-eyed bond salesman, age thirty-six, wearing an obvious toupee.


  Before he flew to Los Angeles, Hewitt had formed certain preconceptions about Michael Milken, a target of the SEC enforcement investigation he was pursuing. Hewitt thought Milken and the investment firm he worked for, Drexel Burnham Lambert, might have profited illegally by manipulating the stock and bond markets.

  The case hadn’t started that way. A tip that unusually heavy trading, late in 1981, by Carl Lindner, the aggressive chairman of Cincinnati-based American Financial Corporation, might reflect improper dealings, had been passed through the SEC enforcement division and landed finally on staff attorney Hewitt’s desk. Although one of Hewitt’s superiors, the number two man in the enforcement division, Ted Levine, was especially eager to see a case developed against Lindner, the matter wasn’t a priority for Levine’s boss, Fedders. The tip was interesting, but it was like dozens of others. Hewitt was told to follow up. With relatively little direction or support from his superiors, Hewitt ultimately had taken the case in a different direction, focusing on Milken and Drexel, rather than Lindner. Drexel at the time was a midsized but aggressive, rapidly growing Wall Street investment house. Milken ran its office in Beverly Hills. It appeared to Hewitt that Milken and some of his clients—insurance companies, savings banks, and the like—had traded securities suspiciously in connection with a corporate takeover, improperly arranged bogus stock and bond trades, manipulated stock and bond prices, and otherwise run roughshod over the federal securities laws. As he prepared for the interrogation Hewitt found that Michael Milken’s raw power to set prices when he traded and sold certain bonds reminded him of the greedy financiers who rigged markets prior to the Great Crash in 1929. Before he ever met him, Hewitt thought Milken was a dangerous man.