Turning Up the Heat on Wall Street

By Janice Castro.

Was the watchdog watching carefully enough? That was just one of the questions on Wall Street last week as fresh controversy swirled around the Street's takeover titans -- and the agency that oversees them. Widening its probe of illegal insider trading, the Securities and Exchange Commission revealed unsettling new details of the Ivan Boesky case, while disputes flared over the use of so-called greenmail tactics in takeover battles.

Most stunning was the news that the SEC had subpoenaed 15 employees of Shearson Lehman Brothers, including its chairman Peter Cohen. The agency is investigating the $482 million buyout of Sheller-Globe, a Toledo maker of auto parts, by a group that included Shearson, the investment arm of American Express. Sheller-Globe's shares surged just before the buyout was made public, rising from 28 3/8 on Jan. 10 to 44 on Feb. 19. That sort of sudden movement in a stock often suggests that illegal insider trading may have taken place.

Shearson has been cooperating with the probe since May. After the subpoenas were disclosed, Cohen insisted that no one at his firm was guilty of improprieties. He also stressed that the investigation had no connection with the insider-trading scandal involving Boesky and Dennis Levine. Said he: "The Government has assured us the subpoenas we have received have nothing to do with Boeskygate, Levinegate or any other gate."

The SEC came under fire for its handling of the Boesky case. In testimony before Congress, SEC officials revealed that the agency had allowed Boesky to reduce his liabilities by $1.4 billion, partly by selling stock, before the insider-trading charges against him were made public. That amount was far greater than the $440 million in stock sales that had been reported previously. The transactions enabled Boesky to avoid huge losses. The SEC has said that if Boesky had been forced to sell out after the charges were announced, the activity would have sent the stock market into a dive. Nonetheless, the disclosures of the watchdog's rubber teeth infuriated the business community.

Smith Barney, another blue-chip investment firm, started its own brouhaha by suing Goodyear Tire and Rubber and Sir James Goldsmith. To stop a takeover bid by Goldsmith last month, Goodyear agreed to buy back the raider's 12.6 million shares of the company for $52.50 apiece, nearly a 22% premium over their market value of $43. Such buyouts at a premium not available to other shareholders are known as greenmail.

In its suit, Smith Barney claims that Goodyear Chairman Robert Mercer and Goldsmith made misleading public statements before their agreement was announced, implying that they would not reach a greenmail settlement. Smith Barney, which had paid more than $47 each for nearly 1.3 million shares of Goodyear, expecting a price spurt during the takeover struggle, took a paper loss of $17 million when the value of the stock flattened overnight. In addition to Smith Barney's action, six other lawsuits have been filed by Goodyear shareholders. They want the same price for their shares that Goldsmith got.

With reporting by Jay Branegan/Washington and Raji Samghabadi/New York