SEC Faces Challenge With Leadership Set to Change

NEW YORK —  First came Levine. Then there was Boesky. Then Drexel Burnham Lambert.

The three blockbuster fraud cases epitomized the success of the Securities and Exchange Commission in exposing financial skulduggery and toughening securities law enforcement standards in the 1980s.

Now, with the federal agency’s enforcement chief, chairman and several other top officials stepping down, what can the SEC do for an encore?

“I think what we have seen is some very good cops and robbers work,” said SEC Commissioner Joseph Grundfest, who has announced he’s leaving in mid-1990 to teach at Stanford University. “The division has scored bull’s eyes with big cases.”

The direct hits constituted a domino effect that thrust the 55-year-old federal agency charged with policing the nation’s financial markets into the spotlight during a wildly prosperous decade whose handmaiden was scandal.

A tip about suspicious trading practices at a Bahamian bank led to Drexel Burnham Lambert Inc. investment banker Dennis B. Levine, who in 1986 agreed to relinquish $12.6 million in insider trading profits and penalties.

Levine cooperated with the government and ratted on speculator Ivan F. Boesky, who paid $100 million in forbidden profits and penalties for insider trading and named names, including Drexel and its “junk bond” impresario Michael Milken.

Raised Agency’s Stature

Drexel is paying $650 million in fines and restitution; Milken has been indicted for fraud and racketeering and could face even bigger financial punishment.

Those cases, along with a calm response to the 1987 stock market crash, raised the SEC’s stature and stirred calls in Congress to boost funding for an agency that raises for the Treasury nearly three times its annual budget.

But with most of the Drexel matter resolved, SEC Enforcement Director Gary Lynch said he is leaving in July after four years atop the agency police squad. SEC Chairman David S. Ruder, a Reagan Administration appointee, is stepping down to return to teaching, which will allow President Bush to shape the agency.

Besides Grundfest, the other three commissioners are rumored on the way out; two are serving without Senate confirmation and one, Edward H. Fleischman, is said to be considering resigning if he isn’t named to succeed Ruder.

All that should point to a period of transition and uncertainty at the agency founded during the Depression in response to the Crash of 1929. But staffers and outsiders said enforcement groundwork laid down by Lynch should ensure a smooth continuation.

“The SEC really has a very strong sense of continuity,” said Alan Bromberg, a securities law professor at Southern Methodist University. “It’s a lot like the British government. The prime minister may change but the people in the bureaucracy tend to be the same over time.”

“There’s no need to bring in anyone to clean things up or change direction radically,” he said.

Other Factors Cited

“Things have continued to work pretty much as usual,” said William McLucas, an associate enforcement director and a top candidate for Lynch’s job.

“There is some level of anticipation about who the new chairman will be and who the director of the division will be,” he said. “It’s not a paralyzing kind of thing, just the kind of thing you’d normally expect to be on people’s minds.”

Aside from the new leadership, two factors could dictate whether the SEC remains in the spotlight. One is the direction of the economy, which historically influences the nature of financial crime. The other is whether the domino effect continues and the Drexel case produces another high-profile bust.

“A legitimate question is, what’s going to be the next Drexel or is there going to be a next Drexel?” said Barry Goldsmith, the SEC’s deputy chief litigation counsel, who helped handle the Drexel case.

“Historically the pattern has been that each of these cases starting with Levine has led to several others,” he said. “A question is, is this going to end some time or is this going to keep continuing? I don’t know, I really don’t.”

The bull market of the 1980s with large numbers of mergers and acquisitions led the commission to cases in which Wall Streeters used advance information of takeover activity to illegally trade in securities: insider trading.

But if the economy slows as many experts predict--merger activity already is showing a sharp decline--the SEC could uncover more financial disclosure improprieties as companies try to cut corners or tinker with statements.