Securities and Exchange Commission Historical Society

Wrestling with Reform: Financial Scandals and the Legislation They Inspired

Manipulating Markets, Making Law: ITSFEA of 1988

Springboard for Congressional Action

“In case you haven’t noticed, Congress is not always able to act immediately to solve particular problems or abuses.  The process can be painfully slow.  As we engage in that process, therefore, we must be certain that the problems we are addressing have not become yesterday’s news, while new, emerging concerns go unnoticed.  One can become fixated on the abuses that have developed with regard to hostile takeovers, and lose sight of the larger picture of which those abuses are only a small corner.”

-October 16, 1987 Remarks of U.S. Representative Edward Markey at the 7th National Conference of Business Ethics

Congress began debating its response. One view was that Boesky had violated existing laws and no new legislation was necessary.  Another was that the magnitude of his malfeasance indicated the need for comprehensive Wall Street reform.  Optimists expected a definition of insider trading and legislation to curb hostile takeovers, but the more skeptical believed that little would happen “without a financial catastrophe, or at least a fair-sized crisis.” (27)

Reformers fell into several camps.  One, led by Senate Banking Committee Chairman William Proxmire (D-Wisconsin) attacked corporate takeovers.  Another, led by Senators Alfonse D’Amato (R-New York) and Donald Riegle (D-Michigan), wanted to define insider trading.  In the House of Representatives, Congressmen John Dingell (D-12th Michigan) and Edward Markey (D-5th Massachusetts) welcomed reform but did not want to define insider trading.  

The years of contention between the Supreme Court and the SEC had produced deterrents based on “contested legal theories,” which irritated Senator D’Amato.  He considered the Boesky scandal an opportunity to clarify the law and undercut those “who hope to escape prosecution on the basis of a legal technicality.”  Senator D’Amato introduced two bills, one to define insider trading and the other to strengthen enforcement, but both died in committee. 

In mid-February, fresh charges against Goldman Sachs and Kidder Peabody traders provided what Senator Howard Metzenbaum (D-Ohio) called a “springboard for congressional action” and revived Senate Banking Committee efforts to define insider trading.  Senator Riegle asked Harvey Pitt, former SEC General Counsel and Boesky counsel, to develop “a plain-language, workable overhaul” of insider trading law. (28)   Pitt convened a committee of American Bar Association officials, SEC staff, Senate aides, former SEC Commissioner A.A. Sommer, Jr., and former SEC Enforcement Director Stanley Sporkin. 

The SEC continued to oppose defining insider trading, especially since a major case, Carpenter v. United States, was before the Supreme Court.  Representative Dingell also opposed a definition so as not to give “fertile legal minds opportunities to exploit loopholes.”

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(27) Wall Street Journal, “Widening Scandal on Wall Street,” November 17, 1986.  Barron’s, “Guess Who’s Back in Town?  The 100th Congress Will Hit the Ground Yawning,” January 5, 1987.

(28) Congressional Record Vol. 133, pt. 1, pp. 676-677.  Washington Post, “Insider Scandal Spurs Call for New Laws,” February 14, 1987.  Congressional Record, Vol. 133, pt. 12, p. 16387.

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