Sharpstown’s Lasting Impact

In 1971 and 1972, men at the highest levels of Texas state government involved themselves in the lowest levels of common fraud. The results were devastating. Houston banking magnate and insurance mogul Frank Sharp approved $600,000 in loans to a number of Texas state government officials, who then used the funds to purchase stock options in Sharp’s life insurance company. The plan was for Sharp to artificially inflate the value of his enterprise, thereby allowing for massive profits for his investors. In other words, Sharp’s investors were in a position to champion legislation that would serve to directly increase their return on investment. And it did. Today, this kind of institutional fraud is universally shunned, but nevertheless prevalent. While Sharpstown spawned a first successful attempt at reforming the manner in which investments are legally pursued, we have yet to cure the ills at the core of the scandal, which continues to threaten our long-term viability as a nation.

After generating nearly $300,000 in profits for its investors, Sharp’s scheme caught the eye of the Securities and Exchange Commission, which proceeded to file both criminal and civil charges against many in the Texas House of Representatives, as well as Sharp and others involved in the fraud. Indeed, in 1971, the very association with Sharp was sufficient to destroy one’s political career. Sharp had become a toxic influence, corrupting the very root of Texas state politics. Allegations of bribery on the Texas House floor were rampant (Keever 2). The parties opposed to this highly unethical and illegal conduct were promptly given an ignominious nickname: “The Dirty Thirty.” Nevertheless, these thirty members of the Texas House of Representatives are largely responsible for maintaining media focus on the Sharpstown Scandal and can be credited with embedding it into our national social fabric as a cautionary tale.

Ultimately, several high-level Texas State officials were indicted by the SEC, tried for the crimes, and found guilty of conspiracy. This conspiracy was predicated upon the acceptance of bribes from Sharp himself, who was found guilty of breaching federal securities law and sentenced to three years of probation and a $5,000 fine. The convicted Texas state officials were only sentenced to five years’ probation, though one successfully appealed and was cleared of all charges (Kinch and Procter 79). Today, these sanctions for such outrageous conduct would be considered spectacularly insufficient and unjust. However, the political process did allow for justice of some kind: while only three elected officials were convicted, all involved in Sharp’s scheme were defeated handily in the ensuing election.

In 1973, Texas passed several of the most rigorous regulatory laws known to the world at the time, requiring that elected officials not only disclose their sources of income but also provide any and all details regarding the manner in which their campaigns have been financed. These reforms were considered revolutionary and borderline invasive at the time, but they paved the way for laws that today protect our institutional investment culture from the kind of fraud perpetrated by Sharp and his cronies. These laws allow for ordinary citizens to scrutinize politicians’ records. Had such laws been commonplace in 1971 and 1972, Sharpstown might never have occurred. It is well worth considering that we have yet to go as far as we might in exposing those who govern to public scrutiny of the highest order.

Frank Sharp’s enduring legacy is of a man who ruined many promising political careers and perhaps many of the politicians who fell prey to his greed would have gone on to greater things. But the real cautionary tale at issue is that of Mr. Sharp and those like him. Just as the Fannie Mae and Freddie Macs of the world lent money to those whom they knew would be unable to honor their debt and mortgage obligations, Sharp lent money on similar shaky collateral. Indeed, it was this very shaky collateral that drew the federal government’s attention. In the case of Sharpstown, the corruption was evident. It is less evident with regard to small-time investors borrowing money that they should not and their lenders exercising “predatory” tactics in selling them on loans that cannot be repaid. These conditions created a major economic recession in 2008 and they will very likely lead to another one in the coming months and years.

Just like Sharp, Charles Keating emerged from humble and seemingly wholesome beginnings. And yet Keating became synonymous with the Savings and Loan crises of the 1980s that precipitated our modern-day crisis of the same form. Those from humble beginnings such as Sharp were the precursors to the Charles Keating’s of the world, confirming that out in the West and Midwest, it is easy to swindle typically uninformed investors. At the time, Sharp’s banking failures constituted the largest in the history of the Federal Deposit Insurance Company. Today, Sharp’s failures pale in comparison to those of institutions such as Lehman Brothers or Bear Stearns. But the very fact that Sharp’s name is unknown to most is indicative of the danger we face going forward, exposing ourselves to investing dangers with which we should be readily familiar. All the warning signs exhibited by Frank Sharp remain alive and well today as readily available means of identifying fraudsters and those who would further their fraud at the expense of innocent people.

Like so many swindlers of the modern-day, Frank Sharp was a charitable man, donating thousands to causes near and far, both religious and secular. Now infamous Ponzi schemer Bernard Madoff also donated much of his time and money to charitable causes, going so far as to entice investors during various fundraisers and religious services. These tactics are time-tested and well-known, and yet investors small and big alike continue to fall victim to them, perhaps due to a perception that greed is not quite as bad as it seems. After all, Sharp’s sentence was extraordinarily light and he died an old and happy man. Indeed, we tend to glorify men of his character through various mediums today.

For example, Martin Scorsese’s “Wolf of Wall Street” is billed as a “cautionary tale.” The film’s subject, Jordan Belfort, viscously swindled investors out of millions of dollars while also promoting a culture of greed and corruption well known to his contemporaries. Today, though saddled with SEC fines, Belfort enjoys his fortune, continuing to stall in the remittance of fines and even profiting off the film based upon his illegal exploits. Somehow, our culture tends to champion these kinds of characters as self-made men who undertook to take their fortunes into their own hands. Yet, while these men harmed many investors they also unwittingly prevented others from committing the same types of crimes because of the new legislation their actions impelled.

This silver lining to the Sharpstown Scandal has made meaningful reform possible and may even prevent future incidents of the kind that transformed Texas State politics and should have transformed our national perceptions of investment even sooner. In other words, it was quite likely that a great deal of stock fraud akin to that perpetrated by Sharp and his cronies had always been undertaken in not only the Texas State Legislature but in legislatures throughout the country. By putting an end to this particular outrage and passing legislation in the scandal’s wake to guard against future such incidents, Texas took the lead in labeling such activity as taboo, regardless of how deep this type of corrupt activity had historically run. Nevertheless, we have yet to attack the root evil at the core of Sharp’s fraud, an evil more prevalent and fundamental than his complicated investment scheme.

At the bottom, Sharpstown was about something that continues to manifest daily at all levels of government: cronyism wrought by lobbying. Sharp wished to further his investments through the political ambitions and greed of those who make the laws we live by. Today, campaign finance reform questions and allegations of favoritism in the awarding of federal contracts, for example, cost American citizens in no less considerable fashion than did the Sharpstown Scandal. In other words, bribery and securities fraud is just one of the many forms by which ordinary Americans are victimized through the legislative processes that they should be able to trust.

For Frank Sharp and the Texas state representatives who allied with him, laws and governance were but a means by which they might increase their wealth. These men thought nothing of the long-term implications of their greed nor did they consider whether it was all the more heinous to institutionalize their greed and culture within the hallowed halls of local government. Today, this kind of greed remains institutionalized as part of everyday governance, with dirty money changing hands at all levels of the local and national government. And yet, little or no attention is paid to this very obvious fraud of epic proportions that threatens our nation’s long-term institutional stability. It may yet be that the Sharpstown Scandal will be remembered as merely a political disaster for all those whose political careers were ended as a result of its ills. However, we would be wise to consider Sharpstown as a cautionary tale with bearing on a cultural disaster that already occurred during the 2008 recession and threatens to occur again.

Works Cited

Kinch, Sam, Jr., and Ben Procter. Texas under a Cloud: Story of the Texas Stock Fraud Scandal. Austin: Jenkins, 1972. Print.

Keever, Jack. “Past Scandal Echoes as Texas Begins a Cleanup: Ethics: Bank Loan and Bribery Case Spewed a Black Cloud over the State 20 Years Ago.” Associated Press 24 Feb. 1991.