A Senate Banking subcommittee on securities oversight yesterday condemned the 1981 stock trading practices of Thomas C. Reed, a deputy national security assistant to the president, and called for stiffer penalties against the use of "insider" information in securities transactions.
The hearing was called by subcommittee Chairman Sen. Alfonse M. D'Amato (R-N.Y.) to examine the performance of the Securities and Exchange Commission and its enforcement staff in the Reed case.
But the three senators present, D'Amato, William Proxmire (D-Wis.) and Donald W. Riegle Jr. (D-Mich.), not only gave a blistering critique of the SEC investigation but also used the hearing to characterize some of Reed's alleged actions as "thievery . . . covering up . . . forgery." Reed has vigorously denied any impropriety in his stock transaction.
The senators urged Reed to resign his post immediately and not wait for his assignment as vice chairman of the presidential commission on MX missile basing strategy to end.
In the end, D'Amato pronounced that "the SEC did its job." He explained his harsh treatment of the commissioners and senior SEC staff members present by saying, "The intensity of the questioning was necessary to demonstrate to the public that we're not all good friends protecting each other."
The securities investigation was touched off by Reed's March, 1981, investment of $3,125 in the stock options of Amax Corp., whose board of directors included his father and other close friends. Within 48 hours of the investment, a merger proposal by a large oil company sent Amax stock soaring, and Reed made $427,000.
SEC Chairman John S.R. Shad defended the commission, saying that, without any direct evidence of wrongdoing, the SEC had filed a strong circumstantial case against Reed and forced him to "disgorge . . . all illegal profits" and pledge not to trade on inside information in the future.
SEC enforcement division chief John Fedders also defended his staff's work, but said that "the staff made concessions" in negotiating the terms of the settlement with Reed.
In his opening remarks, D'Amato called on Reed to resign, saying his continued presence in a senior administration post is a "terrible embarrassment" and "a great disservice to the president."
D'Amato said he will wait to get a White House response before acting on a request by four Democratic senators that additional hearings be held to take testimony from Reed and the official who hired him, William P. Clark, the president's national security affairs adviser.
A White House official said yesterday that Clark does not expect to be called before the subcommittee.
Proxmire, in his opening statement, pointed out that Fedders has in the past referred to insider trading as "thievery," adding, "The SEC staff and its five commissioners obviously believed Mr. Reed had engaged in insider trading and, in Mr. Fedders' words, was therefore 'clearly a thief.' "
D'Amato repeatedly asked SEC officials why they had not given a more direct answer to a National Security Council official who asked them in June, 1982, if Reed had lied in his testimony. Enforcement lawyer Theodore Levine told the senators that he believed Reed's sworn testimony was "incorrect."
Later, two commissioners, including Shad, concurred with Levine's statement. "If we had believed Reed's testimony, we wouldn't have brought the case," Shad said after the hearing.
D'Amato was equally harsh in asking Fedders why the SEC had not charged Reed with "forgery and fraud," noting that Reed had admitted signing other people's names in various handwriting styles to stock brokerage records. Fedders said that a December, 1981, SEC complaint implied an allegation of fraud.
Proxmire, addressing Shad later, stated that Reed had "forged signatures, falsified information and backdated documents, all of which appear to be violations per se of the securities laws."
Shad replied: "I asked that same question, and I learned to my surprise that forgery is not a violation of the securities laws and the fact that he forged signatures is not . . . in our jurisdiction . . . ."
SEC enforcement staffers said one concession they made during negotiations with Reed's attorney was the deletion from the settlement order of a sentence noting that Reed neither admitted nor denied guilt in agreeing to the SEC's terms.
Fedders and Levine said they didn't consider the deletion harmful. But when Proxmire pointed out that Reed's attorney has publicly suggested that the SEC had exonerated Reed, Fedders replied: "We consider the . . . statement made by counsel to be a breach of the settlement negotiation."
Another concession the SEC staff made to Reed was the inclusion of a statement that he had cooperated fully with investigators and had not tried to conceal the lucrative stock transactions. D'Amato said he found the staff's willingness to go along with such statements "incredible."
D'Amato chided staff lawyer Gary Lynch, saying, "Don't be afraid to admit something that's pretty obvious," and later added, "It was obvious what he Reed was doing. It was obvious he was covering up. It was obvious he was not cooperating."
The Banking subcommittee called for stiffer penalties against the use of "insider" information in securities dealings, recommending penalties of three times the amount found to be made illegally in such transactions.