The Hellhound of Wall Street

by Michael Perino

  The lawyer’s strategy was to portray Mitchell as a “patriot” and “blameless optimist” who had been wrongly fingered as the scapegoat for the Depression. Mitchell testified that he had acted in good faith; he had relied on Shearman & Sterling, which told him that the tax transactions were perfectly legal. So why was he on trial? Mitchell was a victim. “Mob psychology,” argued Steuer, “is now in control. Who is to be made the victim—the little fellow? No, we want big fish. And Charles E. Mitchell is the big fish.” Steuer urged the jury not to succumb to that mob mentality. The “law gives you an absolute right to resort to every legal means and device for the purpose of avoiding tax payments,” Steuer reasoned, painting Mitchell as no different from the average taxpayer who doesn’t want to pay a dime extra to the federal government. Mitchell had engaged in perfectly legitimate “tax avoidance,” not illegal “tax evasion.”

  Steuer, once again, lived up to his reputation. When the jury pronounced Mitchell not guilty after a six-week trial, Mitchell burst into tears. Steuer was sporting, according to Newsweek, a “cat-that-swallowed-the-canary smile” as Mitchell thanked him, and the two men swept out of the Federal Court House and headed over to the Bankers’ Club to celebrate, surrounded by a jubilant crowd of Wall Street brokers and runners. The United States attorney general, Homer Cummings, was so shocked by the outcome that he felt compelled to announce he still believed in the jury system. Other commentators saw a classic case of jury nullification—Mitchell seemed like a “good fellow,” according to the New Republic, and since “every other rich man has sold securities to establish losses” there seemed little reason to throw just this one in jail for it.

  The government amended the tax code in 1937 to plug a variety of tax loopholes, and it continued to press civil charges against Mitchell. In 1938, the United States Supreme Court ruled that the banker owed $1.1 million in back taxes and penalties. He could have declared bankruptcy, but claimed it wasn’t the “square” thing to do. He eventually settled with the government and paid off everything he owed J.P. Morgan and Company, although he lost the Fifth Avenue mansion and the other houses to foreclosure. At least as far as his debts were concerned, Morgan’s assessment seemed to be right—Mitchell was a “good, sound, straight” fellow. In 1934, he formed his own firm and the next year he became chairman of the investment bank Blyth & Co., where he would remain for the next twenty years. On December 14, 1955, he died, again a wealthy and respected Wall Street banker. Those who remembered his dramatic appearance in the Pecora hearings two decades earlier apparently still believed that Sunshine Charlie had unfairly been made the scapegoat of the crash and the Great Depression.19

  As the hearings came to an end in June 1934, the most important task for Roosevelt was naming the first SEC commissioners. The laws, as Pecora wrote in his memoirs, were neither a “panacea” nor “self-executing.” The lawyer told the president much the same thing at the time, commenting when Roosevelt signed the Securities Exchange Act, “It will be a good or bad law depending on the men who administer it.” Years later, he denied having any interest in the job, but it is clear that he desperately wanted to be the SEC’s first chairman. Perhaps, having been so responsible for its creation, he thought he deserved the job.

  In addition to owing him for his work on the investigation, the president owed Pecora a political debt. In the fall of 1933, in an attempt to wrest control of New York politics away from a Tammany Hall weakened by the Seabury investigations, Roosevelt and the Bronx political leader Edward Flynn formed the Recovery Party and put up a slate of candidates to run in that year’s citywide elections. Earlier that year, John Curry, the Tammany leader who had thwarted Pecora’s ambitions to run for district attorney in 1929, had pleaded with Pecora to run on the Tammany ticket, and Pecora had the satisfaction of turning him down flat. But Pecora could not turn down the president, who personally asked him to accept the Recovery nomination. He campaigned only on weekends so as not to take away from the investigation, and he even managed to win an endorsement from Untermyer, who called him “fearless” and “independent”; but it was to no avail. Tammany lost the mayoral race to the Republican, Fiorello La Guardia. The anti-Tammany vote for district attorney split between Pecora and the Republican candidate and Tammany brazenly stuffed ballot boxes to send its candidate to victory. Pecora said he was glad to have lost the election. Still, seven months later perhaps he now hoped he could use his willingness to run as a lever to get the chairmanship he really wanted.20

  Raymond Moley, never a fan of the tenacious investigator and increasingly turning in favor of business and away from the New Deal, had other ideas for the SEC chairmanship. Worried that the commission “might fall under the domination of men who had no knowledge of the practical operation of the stock exchange,” Moley submitted a list of eight names to the president. Pecora was not on it. A few days later, when he learned of Pecora’s interest in the job, Moley “verbally added his name to the list.”

  At the top of Moley’s list was Joseph P. Kennedy, father of the future president. It was a startling choice. Kennedy had made part of his fortune in the stock market, helping to run the kind of manipulative pools that Pecora’s investigation exposed. “It is easy to make money in this market,” he told a friend at the time. “We’d better get in before they pass a law against it.” Ardent New Dealers were stunned at the possibility of having such a man oversee the financial community. The Washington Daily News argued that Roosevelt “cannot with impunity administer such a slap in the face to his most loyal and effective supporters.” John Flynn labeled Kennedy a “grotesque . . . economic parasite” and was incredulous that he might lead the commission. “I say it isn’t true. It is impossible. It could not happen.” Chairman Fletcher urged the president to appoint Pecora, and there was some editorial support for the intrepid investigator, but more for James Landis, the Harvard academic who had helped draft both securities acts.

  Roosevelt did not cave. Having angered the financial community so much over the preceding year, Roosevelt decided he needed to mollify it. It was a perfect bit of Roosevelt manipulation from the same man who described his encounter with a Senate delegation this way: “I was good. I saw Barkley and the others, and with my right arm I said, ‘Not one inch will I give in, not an inch!’ But with my left hand I said, ‘Boys, come and get it.’” More pointedly, Roosevelt didn’t view Pecora as an administrator; in the president’s mind Pecora was always a highly skilled lawyer and investigator, but no more. On June 30, 1934, Roosevelt selected Kennedy with instructions that his fellow commissioners should appoint him as chairman. The Interior secretary, Harold Ickes, who had turned down Pecora’s position in January 1933, wrote in his diary that Roosevelt had great confidence in Kennedy. The new chairman was likely to be honest, both because “he has made his pile” and because he “would now like to make a name for himself for the sake of his family.” More importantly, Kennedy knew “all the tricks of the trade,” or as Roosevelt, smiling, later told those closest to him, “Set a thief to catch a thief.”

  As for Pecora, the president appointed him to the commission, but gave him the shortest available term, just one year. Pecora had only asked for a one-year appointment—his financial resources were badly depleted and the SEC salary was nearly as puny as the one he made as an investigator—but he was furious about the chairmanship. He thought he had an agreement from the president that he would be chairman. Returning to Washington from New York, the lawyer hoped to prevail on his fellow commissioners to override the president’s wishes. Indeed, the rumor swirling around Washington was that if Kennedy were selected as chairman, Pecora would resign at once rather than serve under a man he had exposed in his investigation.

  It was over ninety degrees in Washington on the afternoon of July 2 when the newly designated commissioners gathered at the FTC’s headquarters, and Pecora was reportedly in a “fighting mood.” The commissioners were slated to be sworn in at three, but the session was delayed two hours as Pecora and Kenned
y sat intransigently in separate rooms while their fellow commissioner James Landis engaged in shuttle diplomacy between them. Landis finally convinced Pecora not to resign, although in truth it was highly unlikely that the ever loyal Pecora seriously considered embarrassing Roosevelt. The now disappointed investigator dutifully went out to have his picture taken with the new chairman and his fellow commissioners.

  Despite the criticism, Kennedy handled the job well, striking a careful balance between enforcing the new statutes and encouraging capital investment. In his first nationally broadcast speech, which was piped in live to the New York Stock Exchange floor, Kennedy reassured the Street that the new agency did not hold “grudges.” Nor did the members of the commission, he said, “regard ourselves as coroners sitting on the corpse of financial enterprise. On the contrary, we think of ourselves as the means of bringing new life into the body of the securities business.” When Kennedy left the commission late in 1935, even Flynn admitted that he had been its “most useful member.” It seems unlikely that Pecora, who at this point inspired nothing but fear and loathing on Wall Street, would have been nearly so effective.21

  Indeed, Roosevelt was right about Pecora’s unsuitability for administrative work and about his unwillingness to reach a cooperative hand out to Wall Street. Although Pecora’s relations with Kennedy were amicable, he at times thought the chairman’s rapprochement with the financial community went too far, and he constantly found himself taking a harder line when it came to implementing and interpreting the new regulatory structure. After a year and a half of ruthlessly exposing financial wrongdoing, Pecora’s “broad faith in human nature” had been forged into a hardened and indelible cynicism. He thought that the corporate form itself had been “twisted out of its original and socially useful character and has become a weapon in the hands of promoters as powerful as machine-guns in the hands of gangsters.” Accompanying his deep-seated suspicions was a healthy dose of boredom; he seemed a little lost after the thrill of the investigation in the mundane details of getting the agency up and running. He resigned from the SEC after only six months to take an appointment from New York’s governor, Herbert Lehman, as a judge on New York’s Supreme Court, the state’s oddly named trial court. Pecora yearned for positions of status as a tangible sign of his accomplishments; it was probably why he wanted the first SEC chairmanship so badly. Appointment to the bench, he said, fulfilled a lifelong ambition.22

  Less than a year later, Pecora turned down Roosevelt’s offer to reprise his Senate inquiry; this time to lead an investigation of American Telephone & Telegraph on behalf of the Federal Communications Commission. Family considerations seemed to play the overwhelming role in his decision to decline the offer. His wife, Florence, wrote a moving and very personal letter to the president, pleading with him to find someone else for the job. “I suffer from extreme nervousness and melancholia and am constantly under medical attention,” she told Roosevelt. “More than ever I do need Ferdinand with me. For years I gave him to the public with all good grace. Won’t you please let me have him at least at this particular juncture of my life?”

  Instead of going back to Washington, Pecora accepted the nominations of both the Democratic and Republican parties for a full fourteen-year term on the court and, for once, he easily coasted to victory that November, a feat he repeated in 1949. In 1938, he became the president of the National Lawyers Guild, an organization of progressive lawyers founded in protest to the American Bar Association’s exclusion of African Americans and Jews. As dictatorships proliferated around the world, Pecora responded to critics who said that a sitting judge should not take such a position. “There has been no time,” he argued, “when the natural rights of equality before the law, liberty of thought and freedom of speech has been so much in need of preservation by those who believe in democratic principles.” Pecora believed reflexively in moderate progressivism and he offered a fiery denunciation of the organization a year later when it became apparent to him that much of the Guild’s leadership was linked to the Communist Party.23

  The year after he won reelection to the bench, the Democratic and Liberal parties nominated Pecora for mayor of New York. It was an ironically bitter three-way race with the Independent candidate Vincent Impellitteri and the Republican Edward Corsi. The famously righteous and independent Pecora was accused of having organized-crime links and was derided as nothing but a Tammany hack. The always energetic and hardworking Pecora was the oldest of the three, and Corsi insisted that “Grandpa Pecora” was too old to be mayor. Pecora defended himself, calling the allegations of mob ties “ridiculous,” proclaiming “no political boss has every put a collar on me in thirty years of public service,” and demonstrating his vigor with every impassioned speech. True to form, however, he took the high road in the campaign, refusing to sling mud, and ultimately he placed second to Impellitteri. His political career now over, Pecora returned to private practice, but he never gave up the fight to protect the weak and powerless. In 1966, he was one of a group of lawyers and retired judges who fought to prevent the elimination of the New York City Police Department’s Civilian Complaint Review Board.24

  “No memory of having starred,” Robert Frost once wrote, “atones for later disregard / Or keeps the end from being hard.” Although written thirty-five years earlier, his poem poignantly captured Pecora’s life. As he neared his ninetieth birthday, Pecora, the man who lived for acclaim, had little of it. The hearings—his brief moment on the public stage—had long since faded from the public’s memory. Even his unsuccessful mayoral campaign lay more than two decades in the past. Pecora died on December 7, 1971, a few months after suffering a heart attack. He spent his last days at the Polyclinic Hospital in New York, where he liked nothing more than to recount for his nurses how he put Wall Street under oath.

  In those last days with his nurses, Pecora was trying to reclaim a tiny portion of the admiration and recognition that he had garnered in those hearing rooms in Washington nearly forty years earlier. He would have been gratified to know that his death warranted a long obituary in the New York Times, although even the Times thought the most memorable incident in the hearings was when Lya Graf sat on J. P. Morgan Jr.’s lap. The forty years since his death did little to bolster his reputation. Indeed, up until the Great Recession that began in late 2007, Pecora’s name was virtually unknown, even among those who made their living in and around Wall Street. And to those who had heard of him he was most often not a brilliant and courageous lawyer, but simply a flashy showman.

  While the man and his astounding legal performance may be forgotten, his legacy lives on. Every initial public offering, every bond deal, every trade on the New York Stock Exchange or NASDAQ is subject to a regulatory apparatus that did not exist when he took Washington by storm in 1933. Every time companies disclose bad news because securities regulations require them to do so, investors can thank Ferdinand Pecora. And even though financial regulation is in dire need of updating, it remains a vast improvement over the laissez-faire approach that he helped usher offstage. In the turmoil that roiled the financial markets in 2008, bank failures were a small percentage of what they were during the Depression, and there were no bank runs, in large part because Ferdinand Pecora helped blaze the path for federal deposit insurance. The Securities and Exchange Commission has been fairly criticized for its regulatory and enforcement lapses over the last few years, but for most of its history it has been considered one of the ablest of Washington administrative agencies.

  Nearly eighty years ago, in the depths of the worst economic crisis in this country’s history, Ferdinand Pecora showed what a well-run and well-researched Washington investigation could accomplish, and although congressional hearings too often descend into bluster and posturing, the Pecora hearings remain a model to which future investigations can aspire. All they need is a Hellhound.

  ACKNOWLEDGMENTS

  I owe a debt of gratitude to the many people who were enormously generous with their time and experti
se and who helped make this book a reality. Thanks go to Richard McCulley and William H. Davis, at the National Archives and Records Administration, who fulfilled my many requests for documents from the Senate Banking and Currency Committee hearings. The book would not have been possible without the help of the Oral History Office at Columbia University, which generously allowed me to quote from Ferdinand Pecora’s oral history as well as other oral histories in their wonderful collection. Columbia’s Rare Book and Manuscript Library was also an important resource, particularly the Edwin Kilroe Collection of materials on the history of Tammany Hall and the papers of Frank Vanderlip and George L. Harrison. Doris Peterson and Sarah Hanson at the University of South Dakota I. D. Weeks Library were especially helpful in my journey through Senator Peter Norbeck’s papers. My thanks also go to the staffs at the Franklin D. Roosevelt Presidential Library, the New-York Historical Society, the archives of the New York Stock Exchange, the Museum of the City of New York, the Manuscripts and Archives division of the Yale University Library, and the Library of Congress.

  Special thanks go to the librarians at the Rittenberg Law Library at St. John’s University School of Law, particularly William Manz, Aru Satkalmi, and Barbara Traub, who cheerfully tracked down for me even the most obscure books and materials. My research assistants, Lisa Dmiszewicki, Lauren Pennisi, Ryan Pratt, and Brandi Sinkovich, were tremendously helpful as well. I thank them all. For a host of small favors and for prompt responses to my various inquiries I’d also like to thank Bruce Baird, Jeff Bridgers, Susan Brinson, Jeff Cane, Brett Carnell, Jordan Costa, Linda Feinberg, Davis Houck, Michael Klausner, Nicholas Natanson, and Lauren Post. Thanks also go to Dean Richard Matasar of New York Law School and his staff and to Samuel Sanchez of the City College Library Archives, both of whom helped locate information about Pecora’s time at those schools.