Shearson Demotes President in Reorganization : Wall Street: Sources say the troubled firm is close to signing up a sizable new investor.

Battered by market weakness and its own blunders, Shearson Lehman Hutton announced Wednesday a reorganization that will demote Jeffrey B. Lane, the investment firm’s current president and chief operating officer, and elevate a cadre of younger executives.

The regrouping apparently makes Richard S. Fuld, 43, the leading candidate to eventually become Shearson’s next president. Fuld has been head of Shearson’s taxable fixed-income unit and becomes head of the capital markets group, overseeing worldwide trading and research.

Meanwhile, Shearson is also close to arranging a sizable new investment in the firm, according to Wall Street sources. Such an investment--expected to total hundreds of millions of dollars--would remove a threatened lowering of its credit rating that has hung over its head for the past month.

The management reshuffle, which was expected, was designed in part to broaden the number of top executives overseeing Shearson’s far-flung operations. Recently, only Lane and Chairman Peter A. Cohen have stood at the pinnacle of the organization; Cohen has said the arrangement has hurt the flow of information within the firm and contributed to some of its difficulties.

“You’ve basically had Cohen and Lane running the whole show; you’re going here from two guys at the top to five,” said Alison Deans, analyst for Kidder, Peabody & Co. “I think they’ll have a better feel for what’s going on under them now.”

Under the new plan, the organization will be divided into four units--trading, retail brokerage, money management, and investment and merchant banking. Sherman R. Lewis Jr., a Shearson veteran, will head investment and merchant banking; Hardwick Simmons, now chairman of the retail brokerage arm, will become its president; while Lane, the current president, will head the money-management department and other subsidiary operations.

Other key players will be a triumvirate that will run merchant and investment banking under Lewis: J. Tomlinson Hill, Michael D. Madden and Mel A. Shaftel. Another executive with a reduced role in the shuffle is Herbert S. Freiman, who had been chief of the trading and related operations and will now head a committee that reviews use of the firm’s capital in deals.

While Shearson Chairman Cohen seems momentarily firmly in command, that may change if Shearson is not able to engineer a turnaround soon. “I think a lot of people still have questions about that,” said analyst Deans.

One former high-ranking Shearson executive described Fuld, the heir apparent as president, as “a hands-on, very, very tough kind of guy. Apparently they now feel they need more of that kind of approach.”

The executive also said the three heads of Shearson’s investment and merchant banking unit are “three very willful guys,” who have had differences in the past.

The reorganization was forced by a series of embarrassments and difficulties over the past year that has depressed Shearson’s profitability and net worth.

Shearson was forced to fire the president of its Boston Co. unit when it was disclosed that the money-management firm overstated its income by $30 million. Shearson wrote off $100 million of its investment in MCorp., a troubled Texas financial concern.

Shearson’s efforts to diversify from a vast retail stock brokerage--the nation’s second largest--into a full-service firm have not been completely successful; Shearson has had mixed results, for example, in its drive to become a leading takeover deal maker.

Compounding these setbacks has been the stock market’s worsening outlook and the slowdown in some types of corporate takeovers. Shearson earlier this month announced that it would lay off 800 employees and cut commission compensation to brokers for the first time in 15 years.

Outsiders speculated that the new investor in Shearson may buy a block of newly issued Shearson stock and perhaps also up to 20% of the stock now held by American Express Co., the company’s largest shareholder.

American Express has publicly said it wishes to reduce its current 61% stake in the company to 50%, partly to reduce the damage that the Shearson stake has recently done to its net earnings. At 50% ownership, American Express would no longer be required to carry the Shearson results to its bottom line.

Any investment would also be done with the consultation of which owns a 13% stake in Shearson. Nippon’s investment, made in April, 1987, came on condition that American Express wouldn’t lower its investment in Shearson below 40%.

If no additional capital is received, the company’s debt would likely be downgraded by Moody’s Investors Service, a move that would cost Shearson millions in additional interest costs.

Shearson last year earned $96 million on revenue of $10.5 billion. Between 1983 and 1988, its net profit margin declined to 0.9% from 9.4%.