Eagle on the Street

by Coll, Steve; Vise, David A. ;

  To some senior attorneys in the regional offices, Shad was only a distant caricature perceived as a knee-jerk, budget-cutting former Wall Street tycoon hostile to the commission he now ran. Shad helped his cause little when, in a speech to a conclave of stock traders in Boca Raton, Florida, he joked that he recently had been told that the definition of a “damn shame” was a busload of government officials going over a cliff—with five empty seats. The remark was reported in the press and Shad apologized, but the incident only reinforced suspicions in the regional offices. All the regional managers struggled because of the budgetary restraint supported by Shad. Secretaries, computers, even desks and chairs, were sometimes hard to come by in the mid-1980s, and it seemed to some that the headquarters staff in Washington didn’t much care. It angered and appalled Ira Lee Sorkin, chief of the commission’s busy New York office, that while Shad commuted every weekend between Washington and his Park Avenue apartment, in four years the chairman stopped by the New York Regional Office only once or twice—so unknown was Shad that an employee there once mistook him for an intruder and asked to know who he was and what he was doing.

  Bobby Lawyer in San Francisco shared Sorkin’s indignation about Shad. Litigators possessed of raucous demeanors and politically liberal outlooks, Lawyer and Sorkin talked occasionally by telephone, as did other disgruntled regional office attorneys. When the Merrill Lynch case erupted into an emotional confrontation with Shad’s office, Lawyer’s crusade became a vessel for some pent-up frustrations among certain commission staff in Washington and at the regional offices.

  Around the time of Bobby Lawyer’s crusade, for instance, frustration was also building in the regional office closest to SEC headquarters—the Washington Regional Office (WRO) in suburban Virginia. Though it was just a short distance from the commission’s imposing headquarters in Washington, where the flags and the bustle and the sense of urgency in every hallway contributed to the SEC’s culture of self-importance, the forty-employee WRO seemed a world apart. Shad apparently never visited the place.

  In theory, the WRO was supposed to function like the major regional offices in Los Angeles, New York, and Chicago, all of which had troubles of their own partly because of Shad’s neglect. But the WRO’s difficulties were even worse. On paper, its mission was to enforce federal securities laws along the Eastern Seaboard in a five-state region that included Pennsylvania, Delaware, Virginia, West Virginia, Maryland, and the District of Columbia. But the truth was that, when a prestigious or politically charged case came along—the sort of case that might catapult the WRO to prominence and attract talented lawyers—senior lawyers at SEC headquarters took over.

  The big problem at the WRO wasn’t turf, though—it was sex, drinking, and discrimination, or so said staff attorney Catherine Broderick.

  Before Broderick filed a formal grievance in 1984, it was hard to know whether the antics she encountered so routinely in the WRO were known to Shad and the senior staff at nearby SEC headquarters. Broderick’s grievance was the opening shot in the SEC’s Equal Employment Opportunity (EEO) process, in which disgruntled employees had the right to file documents laying out their complaints. The EEO process was lengthy and rarely satisfying, and it was something Shad and many of the other senior level appointees paid little attention to during the Reagan years. In part, that was because those who held political authority at big agencies like the SEC knew they likely would be in government a relatively short time and felt no identity of interest with the huge class of permanent government employees beneath them. And in part it was because early in the EEO process there was no way to weed routine and illegitimate complaints from those allegations that were serious and meritorious. Moreover, many of the ideological conservatives who held the government’s most important posts during the 1980s were utterly indifferent to the issue of employment discrimination.

  At the SEC, John Shad said he saw the issue of employment discrimination the way he saw most everything else: through the filter of free market theory. After he came to Washington, Shad said on numerous occasions that he had learned many years before, in a case at the Harvard Business School, that discrimination was bad for the bottom line. He boasted publicly that he was promoting more women to senior positions at the SEC than ever before. His daughter, Leslie, was in law school, and Shad clearly wanted to see her treated with respect whether she worked in private practice or government. Though senior SEC officials praised Shad’s handling of EEO issues, there were those inside the commission and out who doubted Shad’s commitment to civil rights and the eradication of racial and sexual discrimination. For Catherine Broderick and some other mid-level employees at the SEC, the gap between Shad’s public rhetoric and daily reality seemed immense. To them, Shad’s priorities had seemed clear since the day that the EEO director’s office had been moved to the basement of SEC headquarters to make room for the new Office of the Chief Economist that Shad created.

  Broderick found working in the WRO humiliating and embarrassing. Far from a bastion of the public service ideal, the Washington Regional Office seemed at times like an oily swingers’ pad from some camp Hollywood movie of the 1960s. As time went on, Broderick discovered that she wasn’t the only one in the WRO who had uncomfortable experiences with some supervisors who made crude remarks, solicited sexual favors from subordinates, and granted favorable evaluations and other awards in exchange for sexual favors. Broderick declared on her grievance form that supervisors in the office maintained a “hostile and oppressive working environment” and discriminated against her by giving her unfair performance evaluations because she refused to take part in office parties and other social activities.

  Broderick sent a memo to Shad, outlining some of her complaints, and then waited to see what would happen. EEO Director Phil Savage—the civil rights veteran whose office had been shifted to the basement in favor of Shad’s chief economist—was immediately intrigued and amazed by Broderick’s allegations of womanizing and boozing during work hours. He began to look into her claims. Typical of the pace of workplace discrimination cases, it would take years before the matter bubbled to the surface and became public, putting John Shad and the SEC’s self-conscious traditions of excellence on trial. In the meantime, the matter would remain, like so many other things on the sixth floor of commission headquarters, a closely guarded SEC secret.

  To those who knew him and believed in him, including the mostly young and liberal staff in the SEC’s San Francisco office, there was nobody at the SEC better qualified to lead a righteous crusade than Bobby Lawyer. He was a balding, energetic, perceptive black man with unruly tufts of hair on the sides of his head, protuberant teeth, and an ego bigger than Mississippi, where he was born. Lawyer had grown up in the racially divided Old South, the middle of seven children. His father was an interstate truck driver and his mother worked odd jobs until the last of her children finished school—all seven went to college, though neither of Lawyer’s parents had gone themselves. As a child in Vicksburg, Lawyer had to walk past three of the white elementary schools to get to the segregated school for black kids. There were all-white swimming pools, all-white restaurants, all-white bathrooms, all-white seats on the bus. Later, it was Lawyer’s habit to shrug off the obstacles he had faced without bitterness. “What can I say?” was one of his signature phrases around the SEC office in San Francisco. On the topic of Vicksburg, the question posed to himself was followed by: “I was a kid. It was segregated.… You knew it didn’t seem right. You knew that for sure.”

  There was no explanation for his peculiar surname, other than the guess that it reflected the occupation of some long-ago slave-owner. Still, Lawyer came to Harlem as a teenager in the late 1950s suspecting that he might become an attorney even if it meant, as it did, that he would have to attend high school and college during the day while working through the night. He lived on 145th Street and took the “A” train down to the garment district, where he pushed hand trucks and delivered dresses to the finest Manhattan departmen
t stores, like Saks Fifth Avenue. He started out majoring in chemistry but switched to prelaw, drawn by the romantic image of the trial lawyers he saw on television and at the movies. He told others he wanted to be the kind of trial attorney who could dominate a crowded courtroom and triumph with dramatic cross-examination. After enrolling at Columbia University Law School in 1965, he became active in the civil rights movement, and once he finished, he spent two years working with a group of criminal attorneys in an experimental antipoverty law office in East Harlem. From there he was recruited to be an assistant U.S. attorney—a federal prosecutor—in the prestigious Southern District of New York, the Manhattan office that brought big, complex criminal cases against the city’s political bosses, the Mafia, and errant titans on Wall Street. One of Lawyer’s office-mates was a young, ambitious prosecutor named Rudolph W. Giuliani, who as Manhattan U.S. Attorney during the 1980s would lead, in tandem with the SEC, the most ambitious prosecutions of Wall Street corruption ever.

  Stanley Sporkin brought Lawyer to the commission in 1975. After two years as a trial lawyer in Washington, he headed for the West Coast. He was named chief of the San Francisco office, with a staff of forty, less than two years before Jack Shad came to the SEC.

  Three thousand miles from Washington, Lawyer had the freedom and autonomy to choose the investigations he wanted to pursue aggressively. He had no particular interest in the insider trading prosecutions urged by Fedders and Shad; his preference was for cases where there were more tangible victims, real people or companies who had been defrauded and whose losses could be restored or at least avenged. In that respect, at least, the Merrill Lynch investigation was the kind of cause Bobby Lawyer liked most of all. Before it was over, the matter that generated so much controversy inside the SEC that fall of 1984 would bring Lawyer face-to-face with Shad in a dramatic confrontation at the commission table. Lawyer didn’t mind that, either.

  He is now [saying]—just get rid of [the customer]—he no longer is of any value to Merrill Lynch—he has no more money! Unconscionable behavior for a Merrill Lynch broker. The customer feels as though he has been taken for a ride—and I’m having difficulty in defending our position. Please review the above and advise what action you want me to take.

  —Memo from Merrill Lynch manager Louis Trujillo to supervisor Robert Fisher, July 22, 1981.

  On a busy summer weekday, John J. Bruns, an investigator on Bobby Lawyer’s staff, strode unannounced into the Merrill Lynch branch office in San Francisco, situated in a financial district storefront amid the towering skyscrapers and Lego-like shopping concourses engulfing the eastern tip of the city peninsula.

  Coincidentally, as Bruns walked through the door, halfway across the country the Smith Barney naked-options-writing group was being visited by financial catastrophe in Rhinelander, Wisconsin. But Bruns knew nothing about that case, at least not at the beginning. Soon it became clear to the SEC staff that both the Smith Barney and Merrill Lynch matters revolved around the same question of when to punish an investment house for the misconduct of a stockbroker. But all Bruns knew then was that a disgruntled customer of Merrill Lynch had written to the commission complaining of the allegedly fraudulent sales techniques of a stockbroker named Victor Matl, and of the failure of Matl’s supervisors to make amends.

  Bruns identified himself and said he was there to conduct a surprise inspection of the Merrill Lynch office on behalf of the Securities and Exchange Commission. He asked to speak to the branch office manager, Robert Fisher, or whomever else might be in charge. He said he wanted to see Merrill Lynch’s customer complaint file.

  The office managers scrambled to accommodate him, and soon Bruns was flipping through a file of complaints that dated back to the 1970s. The file raised serious questions about stockbroker Victor Matl’s conduct and also about Merrill Lynch’s decision to keep him on as a salesman in the face of so many fraud allegations by his customers. About thirty-five complaints had been lodged against Matl since 1978—many more than against any other of the approximately seventy-five account executives in the office. At one point recently, Matl had been generating a complaint every week. And the accusations against him were far from trivial. They ran the gamut from forgery to unauthorized trading in brokerage accounts to clearly improper sales techniques.

  When he finished reading, Bruns trundled back across Market Street to the SEC’s dreary offices in the low-rent Tenderloin district. He told his superiors what he had found. Within days, Bobby Lawyer authorized a full-scale inquiry into Matl’s conduct and Merrill Lynch’s supervision.

  Commission attorneys and investigators fanned out across the Bay area, interviewing customers whose names appeared in the complaint file. The SEC staff was led by Cary Lapidus, a young SEC lawyer who had come to the San Francisco office from headquarters in Washington in part because he wanted to work for Bobby Lawyer. The stories Lapidus and the others heard appalled them.

  Max L. Christensen, an Episcopal priest in San Francisco nearing his retirement, said he had opened a money market account with Merrill Lynch by depositing $42,000, nearly all of his worldly wealth, through the mail. Victor Matl soon telephoned, saying that he had been assigned as Christensen’s stockbroker. Christensen said he didn’t want to do anything with his money except let it earn interest for a few months. Matl said he understood, but then suggested that the priest use his money as collateral for loans that would allow him to play the stock market in a big way. Christensen demurred. A month later he received an account statement showing that without authorization, Matl had borrowed about $30,000 from the priest’s account and had sunk it all into a risky oil stock. When Christensen called to protest, Matl assured him everything was safe. There was a way Matl had of making even the most preposterous ideas seem safe and desirable. There was plenty of hard sell in his approach, but his aggression was tempered by kindly, mollifying assurances. Matl had a thick Czech accent, and he spewed financial jargon as if it were a secret code only he understood. He cajoled, pressured, cajoled, pressured. Christensen explained to the SEC investigators that he had trusted Matl.

  “I’ve been forty years in the ministry and I’ve seen all kinds,” he said. “He had a style that fooled me.”

  The oil stock plummeted in price, forcing Christensen to sell at a loss to pay off his borrowings. Matl pushed him to invest in another little-known oil company and to begin trading risky stock options. He sent application forms to Christensen so that extensive options trading could be authorized—unsure what the forms were, Christensen and his wife signed them without filling in any of the financial information required. The SEC investigators requested the records from Merrill Lynch and found that Matl had filled in the blanks himself, without permission. Instead of writing in the Christensens’ actual net worth of about $50,000, Matl entered a figure of $500,000. The form was approved by an office supervisor, and Matl began trading options aggressively in the priest’s account. Christensen had heart trouble, and his health deteriorated along with his finances. He was hospitalized for surgery, and even while Christensen was flat on his back, Matl continued to trade the account without permission, earning commissions for himself while steadily losing the original $42,000 balance. One year after mailing in his deposit, Christensen had only $7,000 left. “That was my inheritance and my savings,” the priest said. “It was a disaster in terms of what we thought of as future security.… I didn’t contemplate jumping off a bridge, although I was quite close.”

  There were other stories. Albert Iaccarino and his wife, Rose Scalise, both doctors, said that when Matl took over their accounts, he sold off more than $100,000 worth of conservative utility stocks and replaced them with more speculative investments—without telling them or seeking their permission. Robert Reeves, a junior high school principal, said he told Matl that his investment goal was to help his children buy homes. Matl then pushed Reeves into speculative stocks and he lost $10,000 in three months. Jan Haraszthy, a retired wine merchant, deposited $15,000 into an account ass
igned to Matl, who quickly recommended that Haraszthy invest in a tax-exempt municipal trust. Haraszthy declined but Matl ordered the trade anyway.*

  As they built their case, conducting interviews, organizing documents, and taking formal testimony from Merrill Lynch officials, it became increasingly clear to Lawyer, Lapidus, and the other SEC staff that they had a solid foundation for fraud charges against Matl. What intrigued them as much as the breadth and depth of Matl’s violations of securities law, however, was the possible culpability of Merrill Lynch and some of its supervisory officials. What they had in mind was a special type of disciplinary action the SEC could bring naming a brokerage—a 15C4 administrative proceeding commonly called a “failure to supervise” case. Though legally it was not as serious as many other types of SEC charges, a failure-to-supervise action hurt a firm’s reputation and was designed for situations where there had been a systemic breakdown in monitoring the conduct of employees.

  For the San Francisco staff, the issue seemed measurable in dollars and cents. Victor Matl’s boss, Merrill Lynch branch manager Robert Fisher, supervised a booming office in San Francisco, one that generated about $20 million in revenue each year. That was hardly a decisive amount for a worldwide giant the size of Merrill Lynch, the largest brokerage firm in the United States, but it wasn’t small change, either. Fisher’s own compensation depended to an extent on the profitability of his office. That profitability, in turn, depended on the commissions generated by his brokers, known as account executives. From top to bottom, the retail brokerage business depended on commissions. And that gave Fisher an incentive to ignore the complaints about Victor Matl.

  The account executives in Merrill Lynch’s San Francisco branch handled more than 25,000 accounts, but as with most sales forces, there were only a handful of exceptional salesmen. These big sellers—producers, as they were called in the brokerage business—generated a disproportionate amount of the office’s revenue and profits. Matl was one. He was consistently among the top five producers in San Francisco, and by some measures, he was the biggest producer of all. Between 1977 and 1983, Matl generated about $1.8 million in sales commissions, of which he personally kept about $600,000. A producer like Matl had special leverage over his employer. Not only would Merrill Lynch lose a considerable stream of revenue if he left, but he was the sort of broker who, because of his personal charisma, might take customers with him if he joined a competitor. In that event, Merrill Lynch would lose both commissions and deposits.