June 11, 1996
Senator Mitch McConnell
Chairman, Senate Select Committee on Ethics
United States Senate
Hart Senate Office Building Room 220
Washington, DC 20510
RE: Possible Violations of Senate Rules and Federal Law by Senator Alfonse D'Amato and His Staff
Dear Chairman McConnell:
This letter constitutes a formal ethics complaint against Senator Alfonse D'Amato (R-NY) and members of his staff. We are filing this complaint because there is reason to believe that:
1. Senator D'Amato may have violated Senate Rules and federal law by
accepting an initial purchase offering (IPO) from Stratton Oakmont, Inc.
("Stratton") during a period when the Securities and Exchange Commission
(SEC) was investigating Stratton for allegations of fraud and other securities
violations. Senator D'Amato was, at that time, ranking minority member
of the Senate Banking Committee, which has jurisdiction over the SEC and
the securities industry. These charges are based on a report prepared by
Charles Loewenson(1) which describes circumstances
surrounding Senator D'Amato's dealings with Stratton Oakmont.
2. Senator D'Amato and his staff may have engaged in a pattern of linking campaign fundraising and legislative activities, and fundraising in a Senate office building. These charges are based on articles by Frank Greve of Knight-Ridder Newspapers and Eric Pooley of Time Magazine.
This complaint is filed pursuant to Senate Resolution 338, which authorizes
the Senate Select Committee on Ethics to "receive complaints and investigate
allegations of improper conduct which may reflect upon the Senate, violations
of law, violations of the Senate Code of Official Conduct and violations
of rules and regulations of the Senate...and to make appropriate findings
of fact and conclusions with respect thereto..."(2)
A: Senator D'Amato May Have Violated Federal Law and Senate Rules in His Dealings with Stratton Oakmont, Inc.
On June 29, 1993, Senator D'Amato earned a $37,125 profit in a single day from an initial purchase offering provided to him by the brokerage house Stratton Oakmont, Inc. D'Amato purchased 4,500 units of Computer Marketplace shares and warrants obtained through Stratton Oakmont, and re-sold the units later that day. Most of the details surrounding the arrangements between Senator D'Amato and Stratton Oakmont were secret.
At that time, Senator D'Amato was the ranking Republican member of the Senate Banking Committee. And Stratton was under investigation by the Securities and Exchange Commission for fraud, manipulating stock prices, and deceptive sales practices. Senator D'Amato's relationship with Stratton deserves a heightened level of review by the Ethics Committee because Senator D'Amato was not merely any member of the United States Senate. As ranking minority member of the Senate Banking Committee, Senator D'Amato was directly responsible for oversight of the SEC and the securities industry. He should have been particularly sensitive to appearances or the propriety of accepting a large monetary benefit from a brokerage house with significant pending governmental interests.
In the settlement of the SEC's case against Stratton Oakmont for violations
of securities laws, Stratton was required to hire an independent consultant
to investigate its brokerage operations. The consultant, Charles Loewenson,
prepared a report on Stratton Oakmont's business activities, including
the circumstances surrounding the initial purchase offering provided to
Senator D'Amato. Much of that report remained sealed along with other documents
in In the Matter of Stratton Oakmont, Inc. But, a petition brought
by Dow Jones & Co. Inc., and a subsequent order by U. S. District Court
Judge Joyce Hens Green, brought about the release of the materials in Loewenson's
report dealing with Senator D'Amato.(3)
Following are excerpts from the Loewenson report:
Senator Alfonse M. D'Amato was a customer of Stratton Oakmont for approximately five months, beginning in April 1993. We received differing accounts of how Senator D'Amato became a Stratton customer. David Beall, the Stratton RR on Senator D'Amato's account, offered one version. Beall stated that he met Senator D'Amato at several informal dinners hosted by Beall's father-in-law, Larry Elovich of Long Beach, New York, a close friend of the Senator. The Senator later opened an account with Beall as the RR. Beall said that he sought Senator D'Amato as a customer in order to use the senator as a source of referrals.
Porush gave a different version of Senator D'Amato's introduction to Stratton. Porush stated that Senator D'Amato discussed opening a Stratton account with Jordan Belfort at a D'Amato fundraising event at a hotel in New York City. According to Porush, Senator D'Amato asked Belfort, "Can you make me some money?" Belfort responded, "Are you sure you want to do this? They [the SEC] are looking at me. It would look bad." According to Porush, Senator D'Amato responded, "Since when is it illegal to make money in the stock market?" [Emphasis added.]
Senator D'Amato's recollection of the circumstances leading to the opening of the account is closer to Beall's than to Porush's version. Senator D'Amato explained that Elovich is one of his "dearest and closest" friends and that Beall calls the Senator "Uncle Al" and he calls Beall "The Rock" or "Big Guy." Senator D'Amato said that his IRA account had contained only $18,000, had been growing slowly, and he had heard that Beall had been doing very well for his customers. Senator D'Amato stated that he told Beall, "Here's the money. Go to town."...
Senator D'Amato's experience as a Stratton customer is atypical in several ways: First, the Senator was permitted to open an account even though he did not come close to meeting Stratton's qualification criteria.(4) Second, he was not personally consulted on trading decisions, but was instead permitted to communicate through an assistant. Third, his account appears to have been in effect a discretionary account, which is contrary to Stratton policy. Fourth, he was allocated a much larger number of units of Computer Marketplace -- a "hot issue" -- than other customers with accounts of comparable size and history at Stratton. New customers with accounts as small as Senator D'Amato's rarely, if ever, get sizeable allocation of Stratton IPOs.
Stratton's bending of its own rules to service a United States Senator who, through his status as senior minority member of the Senate Banking Committee, wielded influence over the SEC, raises suspicions about Stratton's motives. Stratton enabled Senator D'Amato to receive $37,125 from a Stratton hot issue at a time when SEC enforcement proceedings were pending against the firm. (5) [Emphasis added.]
Loewenson's report raises many questions regarding Senator D'Amato's conduct regarding the Stratton IPO, and the real facts behind the $37,125 profit he earned that day.
First, the Loewenson report directly contradicts Senator D'Amato's previous statements about his dealings with Stratton. D'Amato is quoted in Newsday on June 17, 1994 claiming "I am absolutely confident I received no special treatment..."(6) in his dealings with Stratton Oakmont. Loewenson's report states the opposite, that "New customers with accounts as small as Senator D'Amato's rarely, if ever, get sizeable allocations of Stratton IPOs."
Second, did Senator D'Amato improperly use his position or influence as a United States Senator to obtain the IPO? If so, then Senator D'Amato is in violation of Senate Rule 37 which states that:
A Member, officer, or employee of the Senate shall not receive any compensation, nor shall he permit any compensation to accrue to his beneficial interest from any source, the receipt or accrual of which would occur by virtue of influence improperly exerted from his position as a Member, officer, or employee.(7)
Third, what are the real facts which control the interpretation of the windfall profits that Senator D'Amato garnered through the Stratton IPO? Given the "atypical" treatment that Senator D'Amato received from Stratton, the large profits from the IPO may be more properly classified as an improper gift.
In the context of outside earned income, The House Select Committee on Ethics Advisory Opinion No. 13 explained:
In all cases, the real facts will control....In short, income may not be recharacterized in order to circumvent the Rule [House Rule 47, which sets limits on outside earned income]. Indeed, characterization of income is essentially irrelevant.(8)
If the IPO profits are best characterized as a gift from Stratton to Senator D'Amato, then the size of the gift was impermissibly high, under Senate Rules. At that time, Senate Rule 35 prohibited the acceptance of any gift larger than $250 without a waiver from the Senate Select Committee on Ethics.
Fourth, did Senator D'Amato intercede on behalf of Stratton Oakmont with the SEC, or otherwise intervene to benefit Stratton Oakmont with any pending legislative or governmental matter? The Ethics Committee must undertake a full, thorough investigation to answer this question. The Loewenson report is apparently silent on this subject. If Senator D'Amato did intercede on behalf of Stratton Oakmont, then the profits from the IPO might actually be an illegal gratuity, or perhaps even a bribe. In that case, section 201 of the U.S. Criminal Code would be triggered.
It is a crime for a federal official to "directly or indirectly, corruptly"
receive or solicit "anything of value personally or for any other person
or entity, in return for...being influenced in the performance of any official
act" (18 U.S.C. 201). Criminal law on illegal gratuities (18 U.S.C. 201)
prohibits a federal official from directly or indirectly soliciting or
receiving anything of value other than "as provided by law...for or because
of any official act performed or to be performed."
B: Linkages between Campaign Fundraising and Legislative Action in Senator D'Amato's Office Violate Senate Standards of Conduct
After conducting a remarkable survey of Washington lobbyists, Frank Greve of Knight-Ridder Newspapers wrote on May 17, 1995:
One lobbyist said he had received a phone call from an aide to D'Amato days after the lobbyist and a client had met with the senator.
"Everything went OK for your client?" the aide is said to have asked.
"So far," the lobbyist said he replied, because the matter was still pending.
"Well, we haven't seen a contribution from them," the aide allegedly responded.
"I'll let them know and get back to you," the lobbyist said he replied.
The client contributed $5,000 to D'Amato. The matter was favorably resolved.
Another lobbyist said he visited D'Amato in his Senate office. After hearing him out, D'Amato asked whether he'd met an aide whose name, it turned out, was not familiar.
"So Al took me next door, introduced me to the guy, and left," the lobbyist recalled. "The guy turned out to be one of his fund-raisers. He wanted me to help out on some fund-raising events Al was involved with."
"If you call his office and need a meeting," said a third lobbyist of D'Amato, "the assistant or staff member may say 'A good time to meet him might be at this fund raiser he's co-sponsoring for Senator so-and-so.'"(9)
Similar links between campaign fundraising and legislative action were described by Eric Pooley of Time Magazine:
Two lobbyists, who insist on anonymity because they fear losing access to D'Amato, have told TIME that D'Amato staff members solicited contributions from them this year during conversations about pending legislation. "It's raw; it's distasteful," one of the lobbyists says. "Al's guys reach through the phone and say, 'We're helping you, and you have to help us.'"(10)
Such linkages between legislative action and campaign fundraising violate standards of conduct in the Senate. The Senate has a longstanding concern about this type of impropriety, because it can seriously undermine the integrity of the legislative process. Forty-four years ago, Senator Paul Douglas wrote in his classic book, Ethics In Government:
It is probably not wrong for the campaign managers of a legislator before an election to request contributions from those for whom the legislator has done appreciable favors, but this should never be presented as a payment for services rendered. Moreover, the possibility of such a contribution should never be suggested by the legislator or his staff at the time the favor is done. Furthermore, a decent interval of time should be allowed to lapse so that neither party will feel that there is a close connection between the two acts. Finally, not the slightest pressure should be put upon the recipients of the favors in regard to the campaign.(11)
The Senate Ethics Committee's report on the Investigation of Senator Alan Cranston dealt substantially with standards of conduct regarding interventions on behalf of campaign contributors. The Cranston report stated that:
The cardinal principle governing Senators' conduct in this area is that a Senator and a Senator's office should make decisions about whether to intervene with the executive branch or independent agencies on behalf of an individual without regard to whether the individual has contributed, or promises to contribute, to the Senator's campaigns or other causes in which he or she has a financial, political or personal interest. Senators should make a reasonable effort to ensure that they and their staff members, including campaign staff, conduct themselves in accordance with this principle.
This principle is consistent with Senate Resolution 266, which admonishes Members that "[a] public office is a public trust" and states that each Senator "has been entrusted with public power by the people; that the officer holds this power in trust to be used only for their benefit and never for the benefit of himself or a few."...
Because Senators occupy a position of public trust, every Senator always must endeavor to avoid the appearance that the Senator, the Senate, or the governmental process may be influenced by campaign contributions or other benefits provided by those with significant legislative or governmental interests.(12)
Along the same lines, Senate Select Committee on Ethics Interpretive Ruling No. 427 states that:
Senators should not make solicitations which may create the appearance that, because of a campaign contribution, a contributor will receive or is entitled to either special treatment or special access to the Senator.(13)
Applying these guidelines, the Knight-Ridder and Time
articles raise the clear possibility that Senator D'Amato and his staff
violated standards of conduct requiring Senators and their staff to maintain
a firewall between campaign contributions and legislative action. These
articles suggest that Senator D'Amato and his staff have breached this
C: Senator D'Amato Should be Held Accountable for the Actions of His Congressional Staff
In previous cases, the Senate Ethics Committee has held Senators accountable for actions taken by their staff, particularly when the Senator was negligent in setting adequate office procedures to ensure that minimal standards of conduct are met. Senator D'Amato himself has been criticized by the Ethics Committee for precisely this failure to establish such internal standards and procedures. In the Statement of the Committee Regarding Senator D'Amato, the Ethics Committee wrote:
[T]he Committee notes that it is the duty of every United States Senator to conduct his or her office in a manner that precludes its systematic misuse....The activities of Senator D'Amato's brother on behalf of Unisys constituted such a misuse. Senator D'Amato conducted the business of his office in an improper and inappropriate manner. Based on the evidence available to it, the Committee finds that Senator D'Amato was negligent in failing to establish appropriate standards for the operation of his office.(14)
The issue of internal procedures to prevent misconduct in a Senator's office was an important part of the proceedings against Senator Alan Cranston as well. In explaining the Senate Ethics Committee's decision to reprimand Senator Cranston, the Committee wrote:
In reaching its conclusion that established norms of Senate behavior do not permit linkage between a Senator's official actions and his fund raising activities, the Committee also considered the hearing testimony of several Senators about actions which they have taken to translate general ethical principles into office practices designed to avoid such linkage.
Senator Cranston disregarded these standards of conduct by linking, by time and other circumstance, the solicitation and receipt of contributions from Mr. [Charles] Keating with official action on behalf of Lincoln [Savings & Loan Association].(15)
When Senator John Glenn (D-OH) was interviewed by the Committee regarding whether he had established in his Senate office a policy regarding how to avoid linkages between campaign fundraising and official action, Senator Glenn answered:
Yes, we have a rule that if we are talking substantive matters, or people are in the office on an issue, that we will not get into any discussion of contributions, potential contributions, at all.(16)
Apparently, Senator D'Amato had no such internal policy. Or if Senator
D'Amato had such an internal policy, it was often ignored. The blame for
this failure to operate his office according to minimal ethical standards
-- if such a failure did exist -- lies squarely on the shoulders of Senator
D: An Investigation is Needed to Determine if Senator D'Amato or His Congressional or Campaign Staff Violated Federal Law by Fundraising in a Federal Building
The Knight Ridder article suggests that Senator D'Amato and his campaign and legislative staff may have conducted fundraising activities in Senate offices. Congressional offices are intended for Congressional work, not campaign solicitations. If Senator D'Amato or his official or campaign staff has made campaign solicitations from the Capitol or a Senate office building, they are in violation of 18 U.S.C. 607(a):
It shall be unlawful for any person to solicit or receive any contribution
within the meaning of section 301(8) of the Federal Election Campaign Act
of 1971 in any room or building occupied in the discharge of official duties
by any person mentioned in section 603, or in any navy yard, fort, or arsenal.
Any person who violates this section shall be fined not more than $5,000,
or imprisoned not more than three years, or both.
Senate Resolution 266 reminds Senators that public office is a public trust. Any acceptance by a senator of large monetary benefits from parties with substantial interests in pending governmental action, or favoritism on behalf of campaign contributors, or solicitation of campaign contributions with an implicit or explicit connection to legislative matters is a violation of this trust. The Loewenson report strongly suggests that Senator D'Amato improperly accepted and profited from an initial purchase offering from Stratton Oakmont. The Knight-Ridder and Time articles leave a strong impression that Senator D'Amato and his staff have violated the public trust by linking campaign contributions to official actions. Given that the Senate Ethics Committee has previously criticized Senator D'Amato for failing to set appropriate standards and policies within his office so that minimal rules of conduct are obeyed, the Senate Ethics Committee should immediately appoint an outside counsel to swiftly investigate these charges, and recommend harsh punishment if violations are found.
1. U.S. District Court Judge Joyce Hens Green ordered an independent consultant to review Stratton Oakmont's business practices, and to prepare a report on them. Charles Loewenson was the independent consultant.
2. S. Res. 338, Sec. 2(a)(1)
3. See Glenn R. Simpson, "D'Amato's Stock Trading Questioned in Report." The Wall Street Journal, June 6, 1996. Attachment #1 also includes Sharon Walsh, "Trades for D'Amato Said to Break Rules." The Washington Post, June 7, 1996. Ian Fisher, "U.S. Says D'Amato Profited As Brokerage Broke Rules." The New York Times, June 7, 1996.
4. The Loewenson reports states: "The 'New Account Information' form for the Senator shows that he does not meet Stratton's qualification criteria. The Senator listed a net worth of $70,000 (excluding residence), [Footnote: "Stratton's stated net worth threshold is $500,000"] and did not indicate any previous investment in the market."
5. Report of Independent Consultant Charles Loewenson In the Matter of Stratton Oakmont, Inc. See Attachment #2, which includes the text of materials released from Loewenson's report by Judge Green following the petition by Dow Jones & Co. Inc.
6. Charles V. Zehren, "D'Amato's Deal: After Scoring Clinton Trades, Senator Admits 1-day 'Kill.'" Newsday, June 17, 1994.
7. Senate Rule 37, Clause 1.
8. House Committee on Standards of Official Conduct, Select Committee on Ethics Advisory Opinion #13. House Ethics Manual at 133-134.
9. See Attachment #3.
10. Eric Pooley, "Attack of the Killer D'Amato," Time Magazine, September 11, 1995. See Attachment #4.
11. Senator Paul H. Douglas, Ethics in Government (Cambridge: Harvard University Press, 1952) at 89-90.
12. Senate Select Committee on Ethics, Investigation of Senator Alan Cranston, S. Rep. No. 102-223, 102nd Cong., 1st Sess. 11-12 (1991).
13. Senate Select Committee on Ethics, Interpretive Rulings of the Select Committee on Ethics, S. Rep. No. 103-35, 103rd Congress, 1st Sess. (1993). Interpretive Ruling No. 427 at 262.
14. Senate Select Committee on Ethics, Statement of the Committee Regarding Senator D'Amato, August 2, 1991 at 8.
15. Investigation of Senator Alan Cranston at 29-30.
16. Preliminary Inquiry into Allegations Regarding Senators Cranston, DeConcini, Glenn, McCain, and Riegle and Lincoln Savings and Loan, Hearings before the Senate Select Committee on Ethics, 101 Cong. 2 Sess, pt.5, January 4, 1991 at 177.