Look at any financial scandal throughout U.S. history and chances are there’s an imperial chief executive somewhere behind it.
In the 19th century, it was Jay Gould, a former railroad baron who printed false securities to help him wrest control of the Erie Railroad from Cornelius Vanderbilt. Not content to stop there, Gould and his associates sought to corner the U.S. gold market in 1869, only to cause a financial panic and be chased out of town by a mob.
In the 1920s, General Motors founder William Durant, National City Bank President Charlie Mitchell and other top executives allegedly engaged in insider trading and accounting tricks as part of a wave of speculation that swept Wall Street.
Even the founding of Wall Street itself was rooted in the scandal of a prototype chief executive. In 1792, William Duer, a former member of the Continental Congress and close associate of Alexander Hamilton, borrowed heavily from investors to fund various land and business deals. The scheme collapsed, causing financial panic and prompting business leaders to place formal trading rules on the no-holds-barred outdoors trading post on Wall Street that later became known as the New York Stock Exchange. Duer himself ended up in debtor’s prison.
The first major attempt to crack down on the abuses of the business world came with the Sherman Anti-Trust Act of 1890, which placed limits on the ability of major companies in an industry to merge into anti-competitive monopolies and marked the beginning of the Progressive era in American politics. The law was invoked in 1911 to break up American Tobacco Co. and Standard Oil.
While halting the rush of monopoly formation, it did little to rein in speculation and swindles. That had to wait until the bull market of the 1920s collapsed spectacularly in 1929, ushering in the Great Depression.
In response, Congress passed a series of sweeping legislation regulating the stock market. First came the Glass-Steagall Act of 1932-33, which created the Federal Deposit Insurance Corp. and barred banks from operating investment houses. Also in 1933 came passage of the Securities Act, which required companies wanting to sell new securities to register and file disclosure statements.
The next year was the Securities and Exchange Commission Act, which put all the nation’s stock exchanges under the regulatory oversight of the newly formed SEC.
“The Securities Act and the SEC Act form the cornerstone of America’s regulation of the financial markets,” said Charles Geisst, a professor of finance at Manhattan College and author of “Wall Street: A History.”
Of course the scandals didn’t end as seen by the insider trading convictions in the 1980s. And it wasn’t until the perfect storm of a Wall Street downturn, the collapse of Enron and WorldCom and allegations of financial accounting fraud arising out of those collapses that Congress passed the Sarbanes-Oxley Act in 2002. This amended the 1933 Securities Act to make corporate boards and chief executives responsible for financial statements.
“This is by far the most sweeping reform since the early 1930s,” said Troy Paredes, Professor of Law at the University of Washington in St. Louis.
Don’t expect a panacea, however. “There will be other bull markets with their periods of regulatory complacency,” he said. “And then those markets will turn sour and new scandals will appear, prompting a public outcry and more reforms.”
