Mary Schapiro’s tough reputation preceded her. But as the new sheriff of the tarnished association that runs Nasdaq, an even tougher job lies ahead for . . . : The Enforcer

Mary Schapiro, the new sheriff hired by the National Assn. of Securities Dealers to bring law and order to its Nasdaq Stock Market, watched in disbelief last May as the daily volume of tiny Comparator Systems Corp. stock soared to a record 170 million shares.

Schapiro suspected a major penny-stock fraud. And even more shocking to her than Comparator’s price and volume, sources close to her say, was the lethargic response she got from the NASD staff to her urgent demands for an investigation of the Newport Beach firm.

So, determined to establish a tough record from the start, she bypassed them. She picked up the phone herself and called everyone she could think of in search of a private investigation firm to verify the company’s claim that it had developed an automated fingerprint identification system.

Schapiro and her immediate aides then reviewed the company’s finances, staying late into the night to read Comparator’s financial statements and news releases and bombarding the company by fax with questions.

In short order, Schapiro halted trading in the stock. Within a month, Comparator’s stock was delisted.

Schapiro’s closest aides say the episode demonstrates her determination to rehabilitate the tarnished enforcement record of the NASD, whose stock market is the nation’s second-biggest and home to such giants as Microsoft, Intel and MCI, as well as many smaller growth companies.

But proponents of reform at Nasdaq say the incident is telling for other reasons. That she had to make the calls herself, and had to resort to outside help for basic investigative work, left little doubt that she faces an uphill struggle in her efforts to remake the NASD into an effective regulator.

Schapiro is the first president of NASD Regulation, the new, semi-independent enforcement arm of the NASD. In hiring her just months before the Securities and Exchange Commission would finish an exhaustive investigation of Nasdaq, the NASD board hoped to deflect criticism and take credit for hiring a tough regulator who was held in high regard by SEC Chairman Arthur Levitt.

When the SEC issued the results of its investigation in early August, the scope of her challenge became clear. It was the commission’s most scathing report ever on a major stock exchange.

The SEC report accused the NASD of failing to police Nasdaq and of deliberately looking the other way as member firms flagrantly violated basic trading rules by conspiring to overcharge customers on stocks, refusing to honor quoted prices and deliberately delaying the public reporting of big trades. It even charged the NASD with bringing unfair disciplinary cases to harass small firms that tried to improve prices for customers.

At the same time, the SEC announced a settlement with the NASD that spelled out 14 major reforms, most of them Schapiro’s responsibility to carry out. Nearly all of them must be completed within a year.

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For Schapiro and the NASD, the stakes are high. With the aid of new SEC-imposed trading rules designed to make Nasdaq trading fairer to small investors, Schapiro’s tough enforcement could ensure the market’s continued rapid growth.

Nasdaq’s critics say this would give more individual investors the confidence to invest directly in Nasdaq stocks. It might also persuade big companies to keep their stock on Nasdaq rather than jumping to the New York Stock Exchange.

But renewed scandals could erode confidence in the market and accelerate an exodus of big companies, especially technology firms, that are being avidly courted by the NYSE. Last year set a record (62) for such defections; NYSE officials say the number may be even larger by the end of 1996.

To meet this challenge, the NASD board turned to an outsider and a woman to step into what was a classic old boys’ club, a network of insiders dominated by the Wall Street brokerage firms it was supposed to regulate.

When she arrived, she said, “there was a business-as-usual attitude in an environment that really called for something exceptional.”

Schapiro had risen to prominence as a regulator early in her career. When she was President Reagan’s surprise choice to be a commissioner of the SEC at age 33, she confounded widespread expectations that she wasn’t up to the job.

Less than 24 hours before giving birth Aug. 23 to her second daughter, the 41-year-old Schapiro held a news conference to warn consumers of investment fraud on the Internet. By early October she was back on the job, and she spent much of her brief maternity leave on the telephone to her office.

Schapiro holds her family’s politics partly responsible for what she calls her “very pro-regulatory bent.” She grew up in Babylon, N.Y., in an extremely Democratic household on heavily Republican Long Island. Her mother, a former librarian, is a cousin of Terry Sanford, a Democrat who served North Carolina as governor and senator. Her father, a former printer, runs an antique shop.

Out of law school, she took a job in the early 1980s as a litigator for the Commodity Futures Trading Commission at a time when Texas’ Hunt brothers had just been accused of trying to corner the silver market. She moved up quickly within the agency and crossed briefly to the other side of the street to work for the Futures Industry Assn., a trade organization, before returning to the government as an SEC commissioner.

Analysts speculated at the time that Reagan chose her as a way of sending a message to SEC Chairman David Ruder: Don’t try to bring futures regulation under commission control.

Schapiro insists she had no specific mandate from the Reagan administration, although the mere fact that he chose her created the false impression that she was anti-regulatory. That, combined with her admitted lack of experience in securities regulation, initially caused anxiety among SEC staff members.

“I was really young,” she said. “While I knew the futures markets, I didn’t know anything about securities markets to speak of. . . . And I think there were a lot of people on the staff who I think thought, ‘Oh my God, how can this happen to us?’ ”

William McLucas, the SEC’s enforcement chief, credits Schapiro with skillfully overcoming the staff’s doubts: “She did her homework, kept her nose to the grindstone, and within a year had carved out a reputation within the building as somebody who worked as hard as the staff did, learned the cases, learned the industry and was not afraid to ask questions.”

He noted that Schapiro volunteered for drudgery assignments shunned by the other commissioners and made herself available at all hours when the SEC staff needed the emergency intervention of a commissioner.

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“You could find her, you could call her at home, you could interrupt dinner,” McLucas recalled.

In 1994, President Clinton named her chairman of the CFTC, a lions’ den of freewheeling traders who lambasted her for trying--not altogether successfully--to extend the agency’s enforcement powers.

Even that experience, she concedes, did not prepare her for what she faced when she showed up for work at the NASD’s downtown Washington headquarters.

“When I took the job,” she said, “I had no idea how big [it] was. I really didn’t have a good handle at all on the breadth of responsibilities that the association had.”

The NASD has disciplinary authority not only over Nasdaq, which lists the stocks of more than 5,100 companies, but also over more than 5,400 member brokerage firms nationwide, far more than the New York Stock Exchange.

In Schapiro, the NASD board found someone who not only had a respectable reputation as a regulator but who seemed unlikely to launch a public crusade against Nasdaq dealer firms or do an immediate housecleaning of NASD executives. Indeed, Schapiro acknowledged in an interview that while she was at the SEC, Nasdaq “wasn’t particularly on my radar screen.”

But now that she is on the job, she says she is determined to make Nasdaq dealer firms understand that the days when violations went unpunished are over.

“Maybe until there is an enforcement action specifically directed to them, they won’t get it,” she said. She promises that cases meant to get the attention of these firms--with fines much bigger than what the NASD customarily metes out--will become public within months.

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As for cleaning house at the NASD, Schapiro so far has engineered the ouster of only one senior executive, James P. O’Donnell, an executive vice president.

James M. Cangiano, who was in charge of market surveillance while the trading violations cited by the SEC occurred, still holds that job.

John E. Pinto, executive vice president in charge of all of the NASD’s disciplinary apparatus at the time when the SEC says it shirked its job and instead harassed maverick firms, remains at the NASD. He now reports to Schapiro and has greatly reduced authority, but still oversees NASD Regulation’s examinations of brokerage firms for rule violations.

Pinto defended the NASD’s enforcement record during his tenure, stating, “I think we have an unprecedented record for quality cases.” He also said he believes he can “continue to make a very meaningful contribution.”

Joseph R. Hardiman, the NASD’s president and chief executive, and Richard G. Ketchum, the chief operating officer, remain in place. Hardiman is due to step down at the end of November; no successor has been named. (Schapiro was sounded out about the job but said she didn’t want it, sources said.)

Linda Lerner, general counsel of All-Tech Investment Group, one of the small Nasdaq dealer firms the SEC said had been the victim of discriminatory enforcement by the NASD, praised Schapiro but complained, “She’s not shaking the tree hard enough.”

“There’s an awful lot of people who should have taken responsibility for what the NASD did or failed to do during the period of its misdeeds, and almost all of those people are still there,” Lerner said.

Insiders say Schapiro is in fact searching for someone from the outside to put in overall charge of market surveillance. She has also reportedly decided to give some longtime employees a year to get with her program or get packing.

If Hardiman expected a smooth relationship with Schapiro, however, he has been disappointed.

Schapiro says he has not interfered with any of her reform efforts or disciplinary cases. But sources at NASD headquarters say she and Hardiman have radically different philosophies and have clashed--particularly over the NASD’s long-standing policy of blasting its critics and denying any wrongdoing. These sources say Schapiro argued, unsuccessfully, that the NASD, as a quasi-public institution, needed to accept blame to help restore its credibility.

Perhaps the biggest confrontation occurred in midsummer as NASD officials debated what type of public statement to issue when the SEC announced its charges. The sources say Hardiman vetoed suggestions that he issue a public statement under his name and accept at least some responsibility on behalf of the organization for the wrongdoing.

Instead, the NASD put out a news release that omitted his name and accepted no blame. The release emphasized improvements made since the SEC investigation was launched and said, “We believe these changes effectively address the issues raised in the SEC report.”

So Schapiro, without Hardiman’s approval, issued her own news release on the same day. It emphasized NASD Regulation’s commitment to bringing about even more change, including a beefed-up enforcement program.

Schapiro declined to comment on the incident. NASD spokesman Reid Walker acknowledged that “there were some differences of opinion” between Hardiman and Schapiro over the press statement. But Walker denied that there had been any plan to issue a statement with Hardiman’s name in it.

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To help bring about the cultural change Levitt said was needed at the NASD, Schapiro required NASD employees to read the lengthy SEC report and take a two-hour course on it taught by her top aides.

She has won high marks from some pro-investor forces in Congress for drumming up support from other stock exchanges and launching a successful behind-the-scenes drive to eliminate a provision from a securities reform bill, since signed into law, that would have sharply limited the exchanges’ authority to conduct examinations of brokerage firms.

Meanwhile, she is quietly carrying out what one former employee referred to approvingly as “the feminization” of the NASD, an organization that until recently had scarcely a handful of women in senior positions. She has hired or promoted four women to senior posts, including Elisse B. Walter, her new chief operating officer.

But some of the main violations that triggered investigations by both the SEC and the Justice Department may remain. Paul Schultz, an Ohio State University business school professor who co-authored a study that helped spark the department’s antitrust investigation, said there were signs that dealers were still maintaining artificially wide profit margins.

Frequent late reporting of big trades also persists. Failure to report trades publicly within the required 90 seconds prevents investors from knowing the true price of stocks.

Although the problem has clearly improved since a Los Angeles Times series first reported it in 1994, a review of trading records from recent months shows many instances of big block trades in Nasdaq stocks of large companies being reported late in the trading day.

When a reporter pointed these out to Schapiro’s staff, Steve Luparello, an NASD Regulation vice president, confirmed that some seemed highly suspicious and said they warranted investigation.

But the central issue is whether, once media attention from the SEC and Justice Department investigations fades, the financial interests of the big Wall Street dealer firms that are the NASD’s most powerful members will nudge the organization back to its old ways.

Harold Bradley, head trader for the giant Twentieth Century group of mutual funds and one of Nasdaq’s most outspoken critics, gives Schapiro and her new staff high marks for a serious effort at reform.

In one of several small but significant enforcement actions against leading Wall Street firms, NASD Regulation on Sept. 16 fined investment bank CS First Boston $17,500 for failing to honor its quoted prices.

“You can slap hands and talk about surveillance,” Bradley said, “but until you see an enforcement action that includes a major penalty, nothing is going to happen.”

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Bio: Mary L. Schapiro

Job: President of NASD Regulation, the enforcement subsidiary of the National Assn. of Securities Dealers, 1735 K St., Washington, D.C. 20006

Previous Positions:

* Chairman, Commodity Futures Trading Commission, 1994-1996

* Securities and Exchange Commission member, including several months as acting SEC chairman, 1988-1994

* General counsel of Futures Industry Assn., 1985-1988

Born: June 19, 1955, New York City

Raised: Babylon, N.Y.

Education: Bachelor’s degree, Franklin and Marshall College, 1977

Law degree, George Washington University, 1980