House Panel Questions SEC Head on ESM Case

WASHINGTON — The head of the Securities and Exchange Commission said Thursday that the agency probably could have “ventilated” problems at ESM Government Securities Inc. earlier if the SEC had had the authority to regulate such dealers.

Fort Lauderdale, Fla.-based ESM was closed by the SEC on March 4 and was accused of bilking investors, including 15 cities and half-a-dozen savings and loan associations, out of more than $300 million.

Its collapse forced the closure of Home State Savings Bank of Cincinnati, which had invested in ESM, and triggered heavy withdrawals from other privately insured thrifts in Ohio, forcing their temporary closure last week.

Testifying before the House Energy and Commerce finance subcommittee, SEC Chairman John Shad was asked by Rep. Thomas Luken (D-Ohio) whether the agency could have detected the problems at ESM if it had had the regulatory authority during the past five years.

Shad said the problem probably could have been “ventilated” earlier but stressed that he could not be certain that it would have been detected.

Could Have Been Worse

“When you get into a conspiracy involving a lot of people, the question is can you discover that,” Shad said.

However, Shad said the situation would have been worse if the SEC had not moved March 4. He said the presence of the SEC and the intensity of its efforts after such conduct is discovered is a “great inhibitor.”

SEC attorney Bernard J. Barrett Jr. said Wednesday that an auditor accepted $125,000 from ESM to issue false financial data to make the company more attractive to investors.

According to a statement filed with the subcommittee by the general counsel of the SEC, in early 1977 the commission received information that indicated that ESM may have committed violations of federal securities laws.

The counsel said that in June, 1977, the commission began investigating the firm and later determined that excessive “markups” had been made in several transactions. But in November, 1977, ESM refused to provide further access to its records, a move that was later upheld by the courts.

Rep. Timothy Wirth (D-Colo.) said the SEC has been unresponsive to congressional efforts during the past 14 months to get the SEC’s policy recommendations on what would be needed to strengthen the regulatory law.

‘Can’t Answer Yes or No’

Wirth asked Shad whether the SEC needs greater regulatory power over government security dealers.

“I can’t answer yes or no,” Shad replied. “It’s so far beyond any of our existing responsibilities. You’re dealing with massive amounts of money on very thin margins.”

Shad pointed out that frauds have occurred even among those dealers regulated by the SEC.

Commissioner Charles Marinaccio said he believed that the Federal Reserve Board would have to play a role in any regulation of government securities dealers.

The commissioners were asked by the subcommittee to submit within 90 days suggestions for effective regulation of the dealers.

Rep. John Dingell (D-Mich.) noted that a number of similar financial institutions have failed before the ESM case.

“You act as if this were some kind of surprising and extraordinary circumstance that had caught you completely unaware of the situation that exists,” Dingell told Shad.

“I think it is time that you quit engaging in semantics and you look to a cooperative program--in which you will participate--leading to effective regulation of this so that further evil consequences of this kind” do not occur, he said.

After the hearing, Luken said he intends to introduce legislation that would give the SEC authority to regulate such government securities dealers.

“I think that the hearing in total made it quite clear that the ESM situation would never have happened if SEC had the authority of oversight, which they have with other securities firms,” Luken said.