The sparks were flying in a House hearing room yesterday as two of Shearson Lehman Hutton Inc.'s top executives defended the firm against allegations that confidential information was used improperly in a hostile takeover bid for GenCorp Inc. last year.

Under tough questioning by Rep. Thomas A. Luken (D-Ohio), J. Tomilson Hill, codirector of Shearson's merger department, was berated for placing a high priority on promoting hostile takeovers and other deals that generate investment banking fees without sufficient regard for employees, communities and companies.

GenCorp Chairman A. William Reynolds told the House oversight and investigations subcommittee that when Shearson represented Texas raiders Cyril Wagner and Jack Brown in a 1987 hostile takeover bid for his company, the Wall Street firm used confidential information about financial projections and other matters that it had learned as GenCorp's financial adviser in 1986.

While Reynolds was vague at times when pressed about the specific nature of that information, he nevertheless said it aided Shearson in its evaluation of GenCorp as a takeover target for Wagner & Brown.

Hill said Shearson followed all rules regarding confidentiality and handled itself properly in the deal, adding that his firm would never engineer a bid to take over one of its clients.

Although Shearson helped GenCorp analyze a possible management buyout of its General Tire division and also advised the firm on the possible purchase of Goodyear's aerospace division in 1986, Hill said Shearson never earned a fee working for GenCorp and did not consider the Akron, Ohio, corporation to be a client.

Luken challenged Hill, asking if a company only formally became a client when it mailed Shearson a check for its services. Luken repeatedly demanded a yes or no answer to his question as Hill attempted to explain that the moment a potential client formally became a client was a subjective judgment made on a case by case basis.

Hill also said the treatment of any information learned while meeting with prospective clients depended upon the "nature" of the nonpublic information.

"If you received nonpublic information from GenCorp, I believe you should have treated it as nonpublic," Luken said. "I'm glad I don't have to approach you with confidential information. You are so vague and subjective. Can't you answer anything yes or no?"

Rep. Ron Wyden (D-Ore.) said this dispute should send a message to every chief executive in America that confidentiality agreements are necessary before any discussions with investment bankers.

Later in the hearing, Shearson Chairman Peter Cohen sought to downplay the impression that his firm's investment bankers only consider the difference between a public company's stock price and its "breakup" value when looking for takeover targets.

But after nearly three hours of discussion of how the GenCorp hostile takeover bid had hurt the Ohio company, its employees and others, Cohen exclaimed, "I've been in this room since 10 o'clock in the morning and haven't heard anyone bring up the shareholders, who are the owners of the business."

GenCorp Chairman Reynolds said his company was moving in a positive direction before it was forced to borrow heavily, buy back stock, fire employees and take other steps to defeat Wagner and Brown's 1987 hostile takeover bid. The bid was launched after Shearson recommended GenCorp as a takeover target.

Hill said he recommended GenCorp as a target after the company's stock price declined late in January 1987, when a deal to sell certain broadcasting assets fell through.

Rep. John D. Dingell (D-Mich.), chairman of the panel, wondered "whether Shearson's merger and acquisition department was tempted to put its parent company, American Express, 'into play' after its stock price fell eights points on Oct. 19 -- five times the percentage drop of GenCorp's."

Hill also was questioned about his supervisory relationship with former investment banker and convicted felon Dennis B. Levine. Hill acknowledged under questioning that although he was not aware that Levine was paying informants for confidential information about upcoming deals, the information on occasion may have helped Shearson win new clients.

He said Shearson had not given up any fees earned through the inadvertent use of Levine's information. Levine, now serving a two-year prison sentence, used the information to make millions of dollars in illegal stock trading profits.