The Founder

Even during the Great Depression, none of Houston's banks failed. Last month, however, the queues began forming each day before dawn outside the defunct Sharpstown State Bank as depositors applied for payouts from the Federal Deposit Insurance Corp. The agency was making good on accounts --but only up to $20,000 each. About $16 million seemed, for the time being, lost to depositors.

Nor was that the only loss in what was shaping up as a Texas financial-political scandal large enough to eclipse Billie Sol Estes' capers of a decade ago. According to the Securities and Exchange Commission, which has filed a civil suit in a Dallas federal court against 15 individuals and 13 Texas companies, the conspiracy involved fraudulent manipulation of stock prices, trading in unregistered stock, and arranging bank loans and stock trades beneficial to politicians. Though not named as defendants in the suit, a number of the highest Democratic state leaders are implicated, including Governor Preston Smith. Amidst the debris:

> The Strake Jesuit College Preparatory school, through its dealing with Frank Sharp, a central figure in the SEC suit, lost $6,000,000.

> National Bankers Life Insurance Co. and the Olympic Life Insurance Co., both controlled by Sharp, have been taken over by the state of Texas while the SEC surveys the damage. Stockholders are suing the former managements, claiming that "insiders" reaped big profits by manipulating stocks.

> One witness in the year-long SEC investigation, Michael Makris, a Houston businessman, has been indicted for committing perjury concerning his involvement with Sharp and the Jesuit school. A federal grand jury is to reconvene later this month and it may consider further criminal proceedings.

The defendants, charged the SEC in its civil suit, "systematically looted the banks and insurance companies involved in their scheme." Said one official: "As far as can be determined, this is the biggest case we've ever had. It may run up into the tens of millions of dollars."

Big as Houston. The scope is appropriate to the ambitions of Frank Sharp, 64. an East Texas country boy who abandoned the plow at 19 to learn big-city ways. He became a wealthy real estate developer after World War II; one suburban project alone involved 15,000 houses. "You just wait," he once said. "Some day I'll have a city out there bigger than Houston." He also prospered in banking and insurance.

Some years ago, Sharp, though a Methodist, became a benefactor of the Jesuit school and was named a "Founder" of the Society of Jesus. He was the only American Protestant ever to receive that honor. Beginning in 1967, he conducted a complex series of financial transactions with the school, transferring large sums of money and blocks of stock between the institution, his business enterprises and himself personally.

According to the SEC complaint filed in federal court, the scheme became operative in July 1969. Houston's Sharpstown State Bank, like many others, was pinched for funds because of the ailing economy. Legislation desired by Sharp was introduced at a special session of the state legislature that could have given state-chartered banks and perhaps insurance companies tremendous advantages. The measures, actively supported by Governor Smith, would have allowed a state-chartered organization to assume the functions of the FDIC in Texas. The ceiling on insured deposits, then $15,000 under FDIC, would have been raised to $100,000. The change, presumably, would have attracted new funds to banks, and would have removed close federal scrutiny of banking operations.

Too Trusting. Within a few days after the bills were introduced, large purchases of shares in National Bankers Life Insurance Co. stock were made by Governor Smith; Gus Mutscher, speaker of the state house of representatives; Elmer Baum, head of the Democratic state executive committee; State Representative Tommy Shannon, who introduced the legislation; and W.S. Heatly, chairman of the state house appropriations committee. They and other influential Democrats bought the stock at between 11 1/8 and 13 3/4 a share. Much of the buying was done with loans from the Sharp-controlled bank, with the stock itself as collateral.

The legislation was approved on Sept. 8 and 9. Just two days after that, most of the politicians who had bought heavily began selling their shares in National Bankers Life. The stock was then trading over the counter at between 15 and 16. Yet the Strake school, which had previously been involved in business dealings with the insurance company and the bank, bought large blocks of the politicians' stock at between 20 and 26. Why?' The SEC documents offer no clue. The Rev. Michael Kennelly, then Strake's president, said that he had not understood the manipulations, but was in the habit of following Sharp's advice. The Rev. Michael Alchediak, Kennelly's successor, said: "We, by our background and whole formation, have tended to be trusting."

Among the beneficiaries of that trust were Governor Smith and Baum, who, buying shares and selling them at the inflated price, netted $125,000 between them. Speaker Mutscher said that he eventually lost money because he bought back in, but on his original purchase he is said to have made between $50,000 and $100,000. Shannon cleared $30,000, and Heatly $34,000. The SEC documents did not list a specific profit for Sharp. But he benefited by having the use of some of the Jesuits' funds during the frequent dealings between them. Also, his enterprises would have been in line for a windfall had the banking legislation gone on the books.

No Oath. Late in September, however --for no clear reason--Smith vetoed the bills he himself had supported. He explained later that the legislation "didn't do what those interested in the banking business thought to be best." After his veto, the stock of National Bankers Life started going down; the latest selling price was 2 1/2. The SEC investigation, begun as a routine check into a Dallas firm's records, was soon going full pace. When officials questioned Governor Smith in December, he declined to give evidence under oath. Smith maintains, however, that he has done nothing wrong. Joseph Novotny, former president of Sharp's bank, told investigators of getting a request from an intermediary to destroy the records of Smith's and Baum's transactions. Announcement of the SEC charges last month produced the run on Sharpstown State Bank that led to its closing down.

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