RE: Speaking of sh*theads, I think this should really, really piss us all off>
SEC's Pitt Met With Head of KPMG,
Raising New Questions About Ethics
By SCOT J. PALTROW
Staff Reporter of THE WALL STREET JOURNAL
A private meeting 10 days ago by Securities and Exchange Commission Chairman Harvey Pitt with the head of KPMG LLP, which for years was his law client and now is under SEC investigation, has triggered new concern about whether he is abiding by ethics rules requiring him to stay out of matters directly affecting former clients.
Mr. Pitt already has drawn criticism in recent months from investor groups, members of Congress and others for meetings with other former clients on issues pending before the SEC that could have major financial impact on them. Ethics rules generally ban SEC officials from participating in matters that relate specifically to recent former clients.
Mr. Pitt has vigorously rejected such criticism, denying that he has exerted influence on behalf of former clients or given them undue access to him.
Mr. Pitt's meetings with former clients come at a sensitive time, when the financial markets have been hit with a cascade of developments that have shaken investor confidence. Mr. Pitt took office shortly before the Enron Corp. scandal broke, which was soon followed by disclosures of widespread questionable accounting at other big corporations, and evidence that Wall Street securities analysts knowingly misled investors. Under Mr. Pitt, the SEC hasn't been aggressive enough in pursuing reforms, critics say, though some acknowledge that he has taken a more active role recently. Mr. Pitt and other SEC officials have declined requests for interviews on their compliance with ethics rules.
The meeting causing new concern about Mr. Pitt's activities came on April 26, when he met privately with Eugene D. O'Kelly, who days earlier had been named KPMG's new chairman and chief executive. The meeting was meant to be a courtesy call. But in an e-mail memo Mr. O'Kelly sent Wednesday to KPMG's staff, which was reported first by Bloomberg News, he stated that he discussed with Mr. Pitt the SEC's pending investigation of KPMG's audits of Xerox Corp. He said he argued that the SEC shouldn't take any action. The SEC's enforcement division is investigating accounting practices that allegedly enabled Xerox to falsely boost its reported pretax profit by $1.5 billion from 1997 through 2000. The purpose of the memo was to warn employees about potentially unfavorable media coverage relating to the SEC's investigation.
Mr. O'Kelly's e-mail stated, "I wanted him [Mr. Pitt] to know the priority we place on KPMG's relationship with the SEC and the importance of open dialogue. In that spirit, I expressed that we continue to stand by our audit work and client service teams led by Mike Conway and Ron Safran [leaders of the KPMG team that audited Xerox] and strongly believe we fulfilled our professional responsibilities as independent auditors. Furthermore, any action that the [SEC] staff might take is in our view fundamentally unfounded and would pose serious disruption at this juncture in the capital markets."
In a statement, Mr. Pitt firmly denied that the Xerox case came up. "Neither Mr. Kelly nor I discussed any enforcement matter, including Xerox." In a statement issued Sunday, KPMG said initial reports of the meeting "took the internal memo and the SEC meeting out of context." But KPMG didn't disavow Mr. O'Kelly's remarks, and a KPMG spokesman said in an interview that there was nothing inaccurate in Mr. O'Kelly's e-mail, including its account of the meeting.
As a result, the contradictory statements from the SEC and KPMG leave the apparent implication that one side or the other isn't being accurate. This could prove to be a problem for either Mr. O'Kelly or Mr. Pitt if evidence surfaces supporting the other's version of what transpired.
Current and former SEC officials say that a discussion in the early stages of a pending investigation, if it occurred, would be highly unusual, and improper, for the SEC chairman, since the chairman would be expected to make impartial decisions later when the commission votes to authorize any civil charges or penalties.
Lynn Turner, who served as SEC chief accountant under former Chairman Arthur Levitt, said that if the Xerox investigation was discussed, "This is incredible," adding, "If Xerox did come up in the conversation, Harvey should either have cut him off or walked out the door." A current longtime SEC staff member agreed that if any discussion of the investigation did occur, "the staff would find it pretty disturbing."
KPMG, like all of the Big 5 accounting firms, is listed on Mr. Pitt's financial disclosure statement as among the clients that he billed the most while he was a partner until last July at law firm Fried, Frank, Harris, Shriver & Jacobson, with offices in New York and Washington. In his SEC conflict-of-interest agreement, Mr. Pitt stated that, with limited exceptions, he would recuse himself on matters specifically relating to these former clients for a period of one year after becoming chairman.
Some Democrats on Capitol Hill have been critical of Mr. Pitt's handling of accounting issues before the commission and dealings with former clients. In an interview last week, before word surfaced of Mr. Pitt's meeting with KPMG's chairman, Sen. Joseph Lieberman, a Connecticut Democrat, said, "At this moment in the SEC's history, it would be better if the chair was someone who had come to that position with fewer contacts in his professional history in the accounting industry which is under a cloud now. But that only means there's a higher burden of proof on him to prove that he's been fully independent."
White House spokeswoman Claire Buchan said the president sees no reason for concern. "Based on the information we have, we believe that Chairman Pitt is adhering to his ethics agreement and all federal ethics laws. The president has confidence that Chairman Pitt is doing a great job getting tough on corporate misconduct, on increasing disclosure, and on improving shareholder information."
Mr. Pitt's predecessors as SEC chairmen all have had close links to industries or firms regulated by the commission. Indeed, such professional experience is considered vital, assuring that the chairman is knowledgeable about the issues. Mr. Pitt's immediate predecessor, Arthur Levitt, had been a founder of the firm that became Shearson, the brokerage firm that now is part of Citigroup, and later served as chairman of the American Stock Exchange.
But no recent SEC chairman has had as wide a range of clients subject to direct SEC regulation as Mr. Pitt. Mr. Pitt had been SEC general counsel until he left in 1978 to join Fried Frank, becoming a prominent securities lawyer. His financial-disclosure statement filed with the Office of Government Ethics lists 109 clients who each paid him more than $5,000 in fees during the year before he took office in August 2001. In his conflict-of-interest agreement, he stated, "For one year following my appointment, I will not participate in any particular matter involving specific parties in which to my knowledge a person for whom I have served as an attorney within the last year is ... a party," except in a few circumstances allowed by government ethics regulations.
As a private attorney, Mr. Pitt not only represented firms regulated by the SEC, but represented many of them on major matters pending before the commission. For example, Mr. Pitt in 1997 wrote the white paper that the American Institute of Certified Public Accountants, the accounting trade organization, submitted to the commission, arguing strongly against any move by the SEC to crack down on potential conflicts of interest by auditors by limiting the nonaudit work they could do for firms they audit.
Go to Questioning the Books for more accounting coverage.
A KPMG spokesman confirmed that Mr. Pitt helped represent the firm in a matter that became the subject of a major SEC investigation, relating to KPMG's audit of Porta Systems Corp., a brokerage concern. The investigation led to a January 2001 SEC cease-and-desist order prohibiting KPMG from future auditor-independence violations, after the SEC concluded that the firm had compromised its independence as Porta Systems' auditor.
In a statement Sunday, Mr. Pitt said, "I was not KPMG's principal counsel" in its dealings with Porta Systems or in the SEC investigation. He confirmed that he "consulted" with KPMG when it was considering getting into the brokerage business, and that he later had "fleeting involvement" by representing KPMG in one meeting with the SEC, and testifying as a "fact witness" in an SEC administrative law proceeding on the matter.
Last fall, after Mr. Pitt became SEC chairman, as the Enron scandal and its aftermath brought intense pressure for reform of the accounting industry, he held at least six private meetings with representatives of the Big 5 accounting firms and the AICPA. Mr. Pitt has declined to provide details about the meetings, though in a letter responding to questions from Rep. Ed Markey (D., Mass.), the AICPA said topics centered on planning changes for oversight of the accounting industry.
Several supporters of Mr. Pitt, including two current SEC staff members, said they believe Mr. Pitt has acted with impartiality and is being a tough regulator -- but has attracted criticism because he hasn't made a visible effort to meet with investors' advocates as well as with industry representatives. Sarah Teslik, executive director of the Council of Institutional Investors, says Mr. Pitt turned down requests to meet with or address public meetings of her organization at the same time that he was holding closed-door meetings with accounting firms. "What troubles me the most is that he didn't meet with the investors' side," she said.
Mr. Pitt, meeting with industry representatives, did invite public input on new accounting rules by setting up a series of public SEC "round tables." But some proponents of stronger reforms say they weren't included. Baruch College accounting professor Douglas Carmichael, who requested to be on a panel but was told there weren't any openings, says he believes he was excluded because of his dissenting views. Ms. Harlan, the SEC spokeswoman, says, "A small number of individuals and organizations who expressed interest were not invited to participate because panels were full," but denied that any decisions were made based on their opinions.
Mr. Pitt's supporters say his conflict agreement only limits him on particular matters relating specifically to individual ex-clients, leaving him a free hand.
The stories surrounding Mr. Pitt are starting to really smell.... |
