Stock Deals Put Lawmakers Under Scrutiny

WASHINGTON — In a single day last year, Sen. Alfonse M. D’Amato (R-N.Y.) earned $37,125 by buying and selling an initial public sale of stock in a small California computer company, Computer Marketplace.

While his profit was stunning, especially for someone of relatively modest financial circumstances, it is by no means unusual for those lucky few investors who get an opportunity to buy lucrative new issues known as initial public offerings, or IPOs.

Still, D’Amato’s windfall may be significant for what it demonstrates about new opportunities for personal gain in political life today. Like D’Amato, a number of prominent members of Congress--including House Speaker Thomas S. Foley (D-Wash.)--have lately reported earning huge profits by trading hard-to-get IPOs.

Their remarkable windfalls have caused some critics to question whether they, as members of Congress, are being provided special access to stock opportunities that are unavailable to most other citizens. In short, critics ask, are IPO profits becoming a new perquisite of public service?

What makes D’Amato’s IPO profits even more striking is the similarity they bear to the $100,000 bonanza that First Lady Hillary Rodham Clinton realized in the commodities market in the late 1970s.

D’Amato, a fierce critic of the First Lady’s commodities trading, has been hard-pressed in recent days to explain how her profits from those transactions differ substantially from his own IPO earnings.

“I’m no Hillary Clinton,” he insists.

At the heart of this controversy is the debate over what constitutes ethical behavior in a fast-paced political world in which new potential conflicts appear on the horizon with amazing regularity. While outright political bribery is almost unheard of these days, it is not unusual for members of Congress to benefit from investments made with the help of others who are in a position to seek influence.

In the 1980s, both House Speaker Jim Wright and Democratic Whip Tony Coelho were forced to step down when they admitted making money by investing with people who had interest in legislation. Likewise, the central issue in the Whitewater controversy is the allegation that President Clinton and his wife were drawn into investments in commodities and an Ozark real estate development by Arkansas business people seeking political favors.

Of course, lucrative stock deals have always been the stuff of political scandal. As far back as 1892, with the Credit Mobilier scandal, members of Congress were found guilty of accepting new stocks at cut-rate prices.

IPOs have been at the center of controversy in the financial world for the past several years, primarily because the most lucrative new issues are not available to the average investor. The Securities and Exchange Commission is investigating complaints of disgruntled investors who were denied access to IPOs.

Sandy Robertson, founder of Robertson, Stephens & Co., a major investment banking firm based in San Francisco, said competition to buy good IPOs is intense because they are virtually guaranteed to increase in value.

“It’s absolutely handing them cash,” he said. “By design, they are priced to go up at least 15% in the after market.”

Robertson said most brokers, under strict scrutiny from the National Assn. of Securities Dealers, allocate hot IPOs only to those customers who have previously generated big commissions for them. But he added that some brokers have been known to distribute IPOs to ingratiate themselves with influential people, such as politicians.

Among those who profited from IPOs in the past two years were D’Amato, Foley, Sens. Howard M. Metzenbaum (D-Ohio), Barbara Boxer (D-Calif.) and Dale Bumpers (D-Ark.). In the House, the list includes Robert G. Torricelli (D-N.J.), Gary L. Ackerman (D-N.Y.) and Nancy Pelosi (D-San Francisco).

There is no law or rule prohibiting members of Congress from investing in these hot new issues, and some--Metzenbaum, Boxer, Ackerman and Pelosi, for instance--qualify as major investors. Yet it should come as no surprise to them that ordinary investors, who cannot buy the most lucrative IPOs, would complain when politicians are making money buying and selling them.

“It is the mark of a member of Congress who has received preferential treatment,” said Ellen Miller, executive director of the Center for Responsive Politics, a political-reform advocacy group. “It immediately raises the question: Are they getting special treatment for benefits the industry has received from them in the regulatory and oversight process?”

The question that Miller poses is particularly pertinent in the case of D’Amato, the ranking Republican on the Banking Committee, which oversees the activities of the Securities and Exchange Commission.

At the time D’Amato purchased his most profitable IPO, his brokerage, Stratton Oakmont of Lake Success, N.Y., was being investigated by the SEC for stock manipulation and fraudulent sales practices. The firm was forced to pay fines in excess of $2.5 million and three executives were sanctioned.

Stratton Oakmont officials also contributed at least $11,000 in early 1992 to D’Amato’s reelection campaign, but much of it was returned when the senator’s campaign committee learned of the SEC inquiry.

For Metzenbaum, Boxer, Ackerman and Pelosi, IPOs have been a minor part of their portfolios.

Likewise, Bumpers’ wife made a $2,000 profit buying and selling an IPO issued by Back Yard Burgers Inc., with the assistance of her son, who owns one of the company’s drive-through restaurants.

But it is not clear how D’Amato and Torricelli qualified for the IPOs. Neither has enough resources to be a big-time stock trader.

D’Amato’s trades began when he moved about $18,000 from an individual retirement account at PaineWebber Inc. into a discretionary account at Stratton Oakmont. On June 22, 1993, his broker bought the computer company stock for $4 a share and sold it later in the day after it tripled in value.

Torricelli, whose net worth prior to the deal was less than $350,000, appears to have borrowed between $100,000 and $250,000 from the investment banking firm of Brown Brothers Harriman & Co. in order to purchase stock issued by the First Savings Bank of New Jersey. He reported earning $70,000 by selling some of the stock, which has risen in value about 180%.

Likewise Foley, trading initially with no more than $30,000, earned more than $100,000 over a four-year period by buying and selling an impressive list of IPOs that were not available to the average investor. In 42 trades of IPOs between January, 1989, and December, 1992, he suffered only one loss.

Friendship clearly played a role in the profits of D’Amato, Torricelli and Foley. D’Amato put his money in the hands of broker David Beall, the son-in-law of a longtime friend. Torricelli is a close friend of First Savings Bank’s chairman, Joseph Yewaisis. Foley’s trading was carried out by a former high school classmate, Peter de Roetth.

Although D’Amato’s case bears a strong resemblance to Hillary Clinton’s commodities investments, the New York senator insists there are important distinctions. D’Amato has frequently accused the First Lady of receiving the benefit of special treatment from the commodities broker who helped her earn $100,000 on an initial investment of $1,000.

D’Amato noted that--unlike Hillary Clinton, who did not put up sufficient cash to qualify for commodities orders placed in her name--he risked his own money. And he said he has been “forthcoming” about his profits while the First Lady did not disclose her trading records until years later.

Still, members of Congress clearly recognize why their IPO trades have raised eyebrows. Even D’Amato, who has strongly defended his actions, admits his profit is “impossible to justify to the people, given my position.”

Likewise, in response to criticism, both Foley and Torricelli have declared that they will no longer invest in IPOs. As Torricelli explained it: “While no laws or rules of the House of Representatives were violated with the stock purchase, I believe that I have a higher obligation to ensure that my reputation is beyond reproach.”

Yet even though some members have sworn off IPOs, their decision may have served only to feed the criticism. Watchdogs such as Miller see their pledges as an implicit admission that IPO trades create at least the appearance of a conflict of interest for politicians.

“If there wasn’t anything wrong with it,” Miller asked, “then why are they backing away from it?”