6: Interest Groups and Lobbying in Texas

Key Terms and Concepts: pluralistic democracy; interest groups; dominant/complementary state; free rider; “open-shop” state; public interest groups; earmarks; Section 501(c)(3); lobbying; access; revolving door; regulatory capture; grassroots organizing; targeted mass mailings; electioneering; political action committees (PACs); United v. FEC; dark money; litigation; amicus curiae brief, Texas Ethics Commission (TEC)

The Sharpstown Bank scandal was a “pump and dump” securities fraud that occurred in Texas during the early 1970s. Pump and dump describes behind the scenes unethical manipulation of the price of a stock—in this case stocks in an insurance company related to Sharpstown Bank—to inflate its perceived value so that those who have the stock can sell it at a falsely inflated price. The scandal involved corruption at the highest levels of the state government. The name came from the involvement of the Sharpstown area of Houston. The scandal revolved around Houston banker and insurance company manager Frank Sharp and his companies, the Sharpstown State Bank and the National Bankers Life Insurance Corporation (NBL).

The scheme was allegedly hatched by Sharp, who sought passage of new state bank deposit insurance legislation that would benefit his own financial empire. Sharp granted $600,000 in loans from his bank to state officials who would, in turn, purchase stock in National Bankers Life. The stock would then be resold on behalf of these officials at a huge profit, but only after Sharp artificially inflated the company's value and its assets. The scheme succeeded in generating over $250,000 in profits for the state officials and other investors on the order of a quarter of a million dollars. The overvalued stock was used an as enticement by Sharp, who pushed for legislation that would benefit his insurance company and, thus, its investors (the very people who would work to push the legislation through).

One of the victims of the scandal, Strake Jesuit College Preparatory School, sued seventy-three individuals after it lost six million dollars and a portion of the school's land following the advice of Sharp. The Jesuit lawsuit contended that the Houston Educational Foundation, Inc. (which operated Strake Jesuit) lost credit, reputation, and the “well‐established ability to obtain regular and sizable donations” after its former head, Father Kennelly, lent several million dollars of Jesuit money to Sharp.¹ A number of other multi-million dollar civil lawsuits were filed against Sharp, the bank, the insurance, and others.

In the midst of the scandal and these lawsuits, the U.S. Securities and Exchange Commission (SEC) began investigating Sharp and the bank’s actions. The SEC subsequently filed criminal and civil charges against former state attorney general Waggoner Carr, former state insurance commissioner John Osorio, Frank Sharp, and nearly two dozen state other officials and former state officials. Osorio was convicted of conspiracy and embezzlement and faced other charges of fraud and perjury. In addition, the incumbent governor, Preston Smith, was labeled an unindicted coconspirator in a bribery case and lost his bid for reelection. The incumbent speaker of the Texas House of Representatives, Gus Mutscher, Jr., and two of his associates were indicted and later convicted.

Allegations of bribery to push the favorable bills through the government spread to Lieutenant Governor Ben Barnes. Barnes claimed that he had no knowledge of the involvement of several state senators in the Sharpstown scheme. Despite these claims and the fact that he was never formally accused of any crimes, the scandal certainly adversely affected Barnes’ run for governor, which proved unsuccessful, and his early exit from public office. Over half of the members of the Texas legislature were either intimidated by the prospect of future investigations and chose not to run for reelection or voted out of office.² Joseph P. Novotny, former president of the Sharpstown State Bank, pleaded guilty to one count of fraud.

Twenty years later, in the early 1990s, the Texas legislature, at the insistence of Governor Ann Richards and responding to a series of ethics controversies, passed legislation creating the Texas Ethics Commission, banning campaign donations inside the capitol, and enacting new lobbyist disclosure rules.³

1. Martin Waldron, “Stock Fraud Scandal Having a Long Run in Texas,” New York Times, March 8, 1973, https://www.nytimes.com/1973/03/08/a...paid-back.html.
2. Sam Kinch, Jr., “Sharpstown Stock-Fraud Scandal.” Texas State Historical Association: Handbook of Texas, Oct. 2020, https://www.tshaonline.org/handbook/...-fraud-scandal.
3. Jay Root, “Ethics Reform Not Swept Under Rug, But Not Sweeping, Either,” Texas Tribune, June 1, 2017, https://www.texastribune.org/2017/06...eeping-either/.