The Sharpstown scandal was a stock fraud

Pump and dump

"Pump and dump" is a form of microcap stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price....

 scandal in the state of Texas

Texas

Texas is the second largest U.S. state by both area and population, and the largest state by area in the contiguous United States.The name, based on the Caddo word "Tejas" meaning "friends" or "allies", was applied by the Spanish to the Caddo themselves and to the region of their settlement in...

 in 1971 and 1972 involving the highest levels of the state government. The name came from the involvement of the Sharpstown area of Houston

Houston, Texas

Houston is the fourth-largest city in the United States, and the largest city in the state of Texas. According to the 2010 U.S. Census, the city had a population of 2.1 million people within an area of . Houston is the seat of Harris County and the economic center of , which is the ...

.

Background

The scandal revolved around Houston banker and insurance company manager Frank Sharp

Frank Sharp

Frank Wesley Sharp was a land developer in Houston, Texas, United States who was responsible for creating several large post-World War II housing developments....

 and his companies, the Sharpstown State Bank and the National Bankers Life Insurance Corporation. Sharp granted US

United States dollar

The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....

 $600,000 in loans from his bank to state officials who would, in turn, purchase stock in National Bankers Life, to be resold later at a huge profit, after Sharp artificially inflated the company's value. One of the victims of the scandal, Strake Jesuit College Preparatory

Strake Jesuit College Preparatory

Strake Jesuit College Preparatory is an all-men's Jesuit, university-preparatory school for grades 9-12 in the Greater Sharpstown area of Houston, Texas. It is located in proximity to Alief....

, lost $6,000,000 following the advice of Sharp. The school bought the resold stock at $20–26 a share. Using the stock as encouragement, Sharp pushed for legislation that would benefit National Bankers Life, increasing the value of the company to its investors; the very people who would push the legislation through.

The scheme succeeded in generating profits for the investors on the order of a quarter of a million dollars, but the U.S. Securities and Exchange Commission (SEC) stepped in early in 1971, filing criminal and civil charges against former state attorney general Waggoner Carr

Waggoner Carr

Vincent Waggoner Carr was a Democratic Speaker of the Texas House of Representatives and Attorney General of Texas.-Early years, education, military service:...

, former state insurance commissioner John Osorio, Frank Sharp, and a number of others. By the middle of 1971, anyone in the state government who might be connected to Sharp was heavily pressured politically. Allegations of bribery

Bribery

Bribery, a form of corruption, is an act implying money or gift giving that alters the behavior of the recipient. Bribery constitutes a crime and is defined by Black's Law Dictionary as the offering, giving, receiving, or soliciting of any item of value to influence the actions of an official or...

 to push the favorable bills through the government spread to House Speaker Gus Mutscher, Jr.

Gus Franklin Mutscher

Gus Franklin Mutscher is a former Speaker of the Texas House of Representatives, having served from 1969-1972. He was one of several Texas politicians indicted in the Sharpstown bank stock fraud scandal...

, State Representative Tommy Shannon

Tommy Shannon

Tommy Shannon is an American bass guitarist best known as a member of the blues-rock group Stevie Ray Vaughan & Double Trouble and as an early bass player in Johnny Winter's band.-Biography:...

, state Democratic chairman, state banking board member Elmer Baum, Lieutenant Governor Ben Barnes and even Governor Preston Smith

Preston Smith (Texas)

Preston Earnest Smith was the 40th Governor of Texas from 1969 to 1973, who earlier served as the lieutenant governor from 1963 to 1969.-Early life:...

.

The "Dirty Thirty"

"Dirty Thirty" was the name given to thirty members of the 1971 Texas House of Representatives

Texas House of Representatives

The Texas House of Representatives is the lower house of the Texas Legislature. The House is composed of 150 members elected from single-member districts across the state. The average district has about 150,000 people. Representatives are elected to two-year terms with no term limits...

 who grouped against Texas Speaker of the House Gus Mutscher and other Texas officials charged in the Sharpstown scandal. The coalition of thirty Democrats and Republicans, conservatives and liberals, has been given credit for keeping the Sharpstown stock fraud scandal alive as a political issue.

Outcome

Mutscher, Shannon and Rush McGinty (one of Mutscher's aides) were indicted by the SEC in late 1971 and tried in Abilene

Abilene, Texas

Abilene is a city in Taylor and Jones counties in west central Texas. The population was 117,063 at the 2010 census. It is the principal city of the Abilene Metropolitan Statistical Area, which had a 2006 estimated population of 158,063. It is the county seat of Taylor County...

 in 1972. The three were found guilty of conspiracy

Conspiracy (crime)

In the criminal law, a conspiracy is an agreement between two or more persons to break the law at some time in the future, and, in some cases, with at least one overt act in furtherance of that agreement...

 to accept a bribe from Sharp, and sentenced to five years' probation. Sharp was also found guilty of violating federal banking and securities laws and was sentenced to three years' probation and a $5,000 fine. Mutscher later successfully appealed the charges and after the scandal has calmed down, successfully ran for County Judge of Washington County and currently works as a political consultant and lobbyist.

Although none of the other elected officials were found guilty, the damage had already been done to the two Democrat politicians. 1972 was an election year and everyone who was remotely connected to the scandal were defeated by more moderate Democrats, Republicans or other reform candidates. Although not brought to trial, Governor Preston Smith and Lieutenant Governor Ben Barnes saw their political careers effectively ended. Smith, who called the special session to consider the NBL-favorable legislation and then sold his NBL stock for a $62,500 profit before vetoing the legislation, was defeated in the primaries by businessman Dolph Briscoe

Dolph Briscoe

Dolph Briscoe, Jr. was a Uvalde, Texas rancher and businessman who was the 41st Governor of Texas between 1973 and 1979....

 of Uvalde

Uvalde, Texas

Uvalde is a city in and the county seat of Uvalde County, Texas, United States. The population was 14,929 at the 2000 census.Uvalde was founded by Reading Wood Black in 1853 as the town of Encina. In 1856, when the county was organized, the town was renamed Uvalde for Spanish governor Juan de...

. Attorney General Crawford Martin

Crawford Martin

Crawford Collins Martin was a Texas State Senator, Texas Secretary of State and Attorney General of Texas from 1967 until his death.-Early life:...

, who in 1967 issued a legal opinion that was said to have allowed a 2,200% increase in the bank's capitalization, was also defeated in the Democratic Primary for renomination by John L. Hill.

The final impact of the stock fraud scandal on Texas politics occurred during the regular session of the legislature in 1973. The lawmakers, led by new House Speaker Marion Price Daniel, Jr., of Liberty, a moderate and son of a former governor, with active support from Attorney General Hill and Lieutenant Governor Hobby and with verbal encouragement from Governor Briscoe, passed a series of far-reaching reform laws. Among other subjects, the legislation required state officials to disclose their sources of income, forced candidates to make public more details about their campaign finances, opened up most governmental records to citizen scrutiny, expanded the requirement for open meetings of governmental policy-making agencies, and imposed new disclosure regulations on paid lobbyists.