Past Scandal Echoes as Texas Begins a Cleanup : Ethics: Bank loan and bribery case spewed a black cloud over the state 20 years ago. Politicians recall it as they debate current reform measures.

Twenty years after a bank loan and bribery scandal spewed a black cloud over Texas government, the subject of ethics has again become a major legislative topic here.

Today’s headlines don’t have the magnitude of the Sharpstown scandal of 1971, which resulted in the convictions of two elected officials and an aide and probably ruined the political careers of a governor and a protege of Lyndon Johnson.

But Texas politics once again is trying to clean itself up, besmirched by the indictment of the House speaker on misdemeanor ethics violations, incidents of senators accepting $10,000 checks on the Senate floor, a nasty $50-million governor’s campaign, and heavy-handed lobbyist spending, including out-of-state pleasure trips for lawmakers.

“I think it probably is healthy for people to view their politicians with some cynicism,” said Secretary of State John Hannah. “But I think cynicism in Texas has gotten completely out of hand, which handicaps government in its other roles.”

Gov. Ann Richards rates ethics reform as “No. 1 or 2 or 3” on the legislative agenda. She put Hannah, whom she appointed secretary of state, in charge of the effort.

A strong ethics code is an “absolute minimum,” said Lt. Gov. Bob Bullock, presiding officer in the Senate.

And House Speaker Gib Lewis, who faces the misdemeanor indictment accusing him of failing to properly disclose a gift and a business interest, agreed. “I think you’re going to see an ethics bill,” he said. “I think we ought to have one.”

In Texas, where ethics reform infrequently grabs the attention of lawmakers, Sharpstown comes to mind.

“We were talking about it this morning,” said Bullock, as he settled in an office chair for an interview.

The Sharpstown scandal centered on two banking bills passed in special legislative session in September, 1969, and unsecured loans made by Houston developer Frank Sharp, purportedly to gain the bills’ passage.

The scandal broke Jan. 18, 1971, when the U.S. Securities and Exchange Commission filed a civil suit in federal court in Dallas as Texas Democrats gathered in Austin to celebrate the reelection of Preston Smith as governor and Ben Barnes, Johnson’s protege, as lieutenant governor.

The SEC asserted that the purpose of the 1969 legislation, which passed virtually unnoticed, was to enable Sharp’s now-defunct Sharpstown State Bank to evade regulation by the Federal Deposit Insurance Corp.

Fifteen individuals, 12 corporations and one pension trust were named in the SEC suit, which widened into federal and state investigations that resulted in the conviction of then-House Speaker Gus Mutscher, another House member who sponsored the bills, and a Mutscher aide.

They were convicted by a jury of conspiring to accept bribes in the form of loans from Sharpstown Bank in exchange for passing the bills Sharp wanted. Each of the three drew a five-year probated sentence.

The money from the loans was used to buy stock in National Bankers Life Insurance Co., which Sharp controlled.

Prosecutors said that the day after the bills passed, the defendants sold the stock to a priest friend of Sharp’s for twice the market price that day. The insurance company later collapsed.

Then-Gov. Smith and a business partner also shared a $125,000 profit from National Bankers stock purchased with a loan from Sharpstown Bank. But Smith vetoed the two banking bills and never was charged with wrongdoing.

In 1972, the year after the scandal broke, Smith and Barnes were defeated in the Democratic Party primary for governor.

The turnover in the Legislature from 1971 to 1973 was extraordinary, approximately half of the 181 senators and state representatives. The 1973 Legislature passed new laws on open meetings, lobby control and campaign financing.

Sharp himself pleaded guilty to violations of federal banking and securities laws and was given a three-year probated sentence. He was granted immunity from further prosecution in return for his testimony before a federal grand jury.

Many Texas Democrats, including Barnes, insist to this day that the stock-fraud investigations were engineered by the national Republican Administration to discredit state politicians.

“I think it’s still debated on whether or not the bills were good or bad,” Hannah said. “Of course, whether a bill’s good or bad, if you’ve got bribery involved, it’s beside the point.”

Lewis said the House ethics bill that will be considered this year would eliminate “some questionable practices” now allowed by state laws, such as honorarium payments to officeholders and using campaign funds to pay rent, buy cars and make other purchases.

Bullock said the Senate proposal doesn’t treat public officials “like children and say, ‘You can’t do this.’

“What it does say is, ‘If you do it, you’re an adult person, and if you hold public office you’re accountable for what you did.’ ”