John Shad; Led SEC Probe of Brokerage

John S.R. Shad, a former Securities and Exchange Commission chairman who initiated an investigation of Drexel Burnham Lambert and then went on to try to clean up the brokerage as its head, has died. He was 71.

Shad died Thursday in New York after heart surgery, said his daughter, Leslie Shad.

As head of the SEC, the federal agency created in 1934 that regulates virtually all the nation’s investment activities, Shad ordered a wide-ranging probe of Drexel in 1986 that eventually led to a securities-fraud plea agreement with the Justice Department. In April, 1989, Drexel hired Shad, who by then was U.S. ambassador to the Netherlands, as part of its settlement with federal regulators.

Shad left Drexel just over a year later as the failing brokerage tried to work its way through a bankruptcy reorganization.

As chairman of Drexel, Shad donated his compensation to the Harvard Business School Leadership and Ethics Program.

Drexel helped fuel the takeover craze of the 1980s by establishing a marketplace for risky securities known as junk bonds. But the fraud charges doomed the firm, which agreed to pay $650 million in penalties and pleaded guilty to six felonies.

Shad was a vice chairman of now-defunct E.F. Hutton & Co. from 1970 until his appointment to the SEC by President Ronald Reagan in 1981. In 1987, Shad left the SEC to become the envoy to the Netherlands.