Boesky-buster, leaving SEC, wants higher ethics
Washington — WHEN John Shad was a boy, his grandmother gave him a piece of advice. Divide your life, she told the future chairman of the Securities and Exchange Commission (SEC), into three parts: a third of the time to learn, a third to earn, and a third to serve.
To date, Mr. Shad has stuck by his grandmother's agenda - much to the chagrin of Ivan Boesky, Dennis Levine, and several other big names on Wall Street. For Shad's idea of service has led to their downfall and to the biggest crackdown that Wall Street has seen.
``John Shad is responsible for some of the greatest accomplishments in law enforcement in the history of the commission,'' says Theodore Levine, who worked at the SEC for 14 years and is now one of the lawyers representing Mr. Boesky. Last November the SEC charged Boesky with making millions of dollars in illegal profits by trading stocks on ``inside'' (nonpublic) information. Boesky agreed to pay $100 million in penalties and now faces a criminal charge.
Shad's crusade seems as much personal as professional. He is disturbed by what he calls ``a change in moral attitudes'' in the United States since the end of World War II, and his post at the SEC has given him a chance to try to reverse that ethical decline.
``I think a lot of young people feel that ethics is something you get the reward for in the hereafter rather than in the here and now,'' Shad told the Monitor recently. ``I believe you get the benefits here and now as well as in the hereafter.''
Soon Shad will leave the SEC to become US ambassador to the Netherlands. But as he wraps up his 5 years, critics and admirers say his leadership has rewritten the code of conduct on Wall Street.
``The Street is examining everything they're doing more closely than they have in the past,'' says Robert Fomon, chairman of E.F. Hutton & Co., where Shad worked for 18 years. Hutton has not been involved in any of the SEC's insider-trading indictments, though it pleaded guilty to a multimillion-dollar check-kiting scheme in 1985. ``The attitude at Hutton is that long range it's going to be very good for the industry,'' Mr. Fomon says.
Law enforcement is not the only way Shad has attacked corruption. He is giving an estimated $20 million to Harvard Business School to start a program on business ethics and leadership.
``I think John Shad is genuinely disturbed by the black eye [the SEC prosecutions] have given the industry,'' says Gregg Jarrell, who was Shad's chief economist until January. ``The Harvard gift indicates the tremendous torment he's felt.''
The son of a schoolteacher and a sportswriter, Shad was not born wealthy. He worked his way through college as a riveter at Lockheed Corporation. He joined the Navy and caught the tail end of World War II. Upon his return, he finished college and went through Harvard Business School under the GI Bill. A few years later, he got a law degree at New York University at night while working during the day.
Shad made his fortune in the place that many today are making their criminal records - Wall Street. Though his rise to vice-chairman of E.F. Hutton was ``not meteoric,'' according to Fomon, it was enough for Shad to squirrel away some money. When Shad left Hutton - and the earning stage of his life - for the SEC, he was reputedly the wealthiest man to join the Reagan administration.
Initially, he was regarded with suspicion by his staff. He had been one of Ronald Reagan's leading fund-raisers in New York in the 1980 campaign, and some aides believed he would have the same hands-off approach to business that other Reagan appointees had shown. In addition, there was ``some speculation'' that he would go easy on his old Wall Street colleagues, says Mr. Levine, who worked at the SEC under Shad until 1984.
But soon his style and his obvious personal sacrifices in taking the job won the staff over, says Dr. Jarrell. On the personal side, Shad left a $375,000-a-year job to take the $55,000 SEC salary. (His daughter, just out of law school, makes more money than he does.) He never quite made Washington his home; in fact, he still lives in a hotel during the week and spends the weekends with his wife in New York.
It also became clear that Shad was more committed to the SEC as an institution than as a lever to raise his personal profile. For example, Jarrell recalls a closed meeting in which the five commissioners were to decide on a tender-offer case. Whichever way it went, the decision would send an important signal to Wall Street. When the vote was counted, Shad was in the minority.
Then Edward Fleischman, who was the newest commissioner and had voted against Shad, spoke up. ``He said, `You're going to have to go out and defend this policy. I won't force you to argue this in public,''' Jarrell recalls. Mr. Fleischman then asked for another vote, clearly intending to withdraw his vote, meaning that the chairman could decide the issue.
But Shad refused to take another vote. ``He went out and defended the decision, and no one ever knew that the commission was split on it,'' Jarrell says. ``It was another case of John Shad putting himself and his personal victories well down on the priority list.''
Shad's arrival was also a boon for women at the SEC. The commission is something of a finishing school for young talented lawyers, since it offers rigorous training but low pay. Male lawyers in particular are courted by private firms and frequently leave the SEC after short stints.
``Shad wanted to reduce the turnover, so he promoted the ones who were talented and were going to stay,'' Jarrell says. ``When you look at who went up the ladder, it was the women.''
Linda Quinn, for example, came on as a junior lawyer. Shad soon put her in the thick of the SEC's merger-and-acquisition work - a linchpin position in the present takeover frenzy - and made her his special assistant. Now she is head of the Corporation Finance Division, the largest at the SEC.
Under his stewardship, the SEC has been run in many ways like a business, scoring a string of ``profitable'' years in which the SEC's fees exceeded its budget. Shad is proud of the point, but others are critical, saying that under Shad, the SEC has not increased its budget and staff enough to cope with the jump in stock market activity and flurry of mergers and acquisitions.
This was ``a disservice to the Securities and Exchange Commission of the United States,'' says John Evans, a former SEC commissioner, ``and we're paying for that disservice in a number of ways.'' He notes that ``it's very hard'' for Congress to give funds to an agency when the head says it doesn't need it.
This year Shad is accepting a 22 percent budget increase. But some are concerned that more than half of that is going to EDGAR, an electronic data system that has never really gotten off the ground, rather than to hiring new investigators.
In looking back, Shad thinks his most far-reaching achievement at the SEC occurred not in the courtrooms but in the corporate-filings room.
``Insider trading has gotten a tremendous amount of publicity,'' he says. ``But legal scholars have said that the integration of the reporting and registration requirements,'' which saves companies $1 billion a year, ``is the most important improvement in the securities law in 50 years.''
Shad has yet to be confirmed as ambassador to the Netherlands, but most think the nomination will sail through the Senate. Some think he wants to expand his international experience so he can return to a Cabinet position in the US.
In the meantime, ``the staff he inherits at the Netherlands is in for quite a shock,'' says Jarrell, who well remembers the 80-hour workweeks and 7 a.m. meetings. ``They will be writing working papers, working themselves to death, and wondering what happened to them.''