Re: 5/29/02 - Law.com: Harvey Pitt's Lonely Crusade; The SEC chairman is being attacked from all sides
Harvey Pitt's Lonely Crusade
The SEC chairman is being attacked from all sides
Otis Bilodeau
Legal Times
05-29-2002
Harvey Pitt was by many accounts the best private securities lawyer in the business. But that $850-an-hour reputation hasn't helped him much since he left law firm life to become the nation's top securities cop.
Instead, the chairman of the Securities and Exchange Commission finds that, nine months into his tenure, his past life as the go-to lawyer for companies under SEC scrutiny continues to haunt him -- and provide fodder for his critics on the left and the right.
Yet as his agency strains to cope with an unrelenting barrage of corporate scandals, Pitt staunchly defends his tenure as chairman, pointing to the unprecedented volume, and velocity, of enforcement actions under his watch.
"I think if you look at what we're doing, the question [of whether I'm too soft on market abuses] answers itself," Pitt said last week in an interview. "We are more vigorous and more diligent ... than at any time in the commission's history. Criticism comes with the job, and I'll have to take it into account in deciding how I'm going to handle things going forward."
Few of Pitt's critics can argue with the numbers. Under his notoriously detail-oriented leadership, the SEC enforcement machine seems to have found a new gear: Despite grumblings about low pay, the staff has opened more investigations and sought more injunctions, asset freezes and other remedies than during any comparable period in the agency's history, according to agency statistics.
"Clearly, the enforcement activity is more focused, they're clearly moving more quickly, and they're definitely less flexible on deadlines," says Kirkpatrick & Lockhart D.C. partner and former SEC enforcer Michael Missal.
"They are moving incredibly quickly when something hits the papers," he adds. He says that after negative news involving a corporate client appeared in the press last week, the client was contacted by the SEC "within 15 minutes." Missal declined to identify the client.
Yet the public sniping continues -- in stereo. Common Cause, the liberal government watchdog group, has seized on Pitt's now-infamous meetings with executives at KPMG and the Xerox Corp. and called for his resignation, claiming the meetings with former clients point to conflicts of interest. On the other end of the political spectrum, the editorial page of The Wall Street Journal has denounced Pitt as a political liability, claiming that his PR gaffes make him vulnerable to regulation-craving Democrats in Congress.
Some in the private securities bar worry that in order to prove how tough he is, Pitt may be cracking down too hard -- and squandering the legal and ethical high ground that the agency needs now more than ever. The markets are suffering from a crisis of confidence among investors, and politicians on Capitol Hill are pressing Pitt to clean up the wreckage of the last bull market.
As a case in point, a handful of private lawyers point to the agency's newfound approach to what securities lawyers call "O&D bars." They fault the agency for being much more aggressive in seeking -- or threatening to seek -- the removal of corporate officers and directors who run afoul of securities law. Such a bar can temporarily, or even permanently, prevent a malfeasant executive from holding similar jobs at other public companies.
These lawyers claim the enforcement staff has been wielding threats of O&D bars as cudgels in settlement negotiations. And they suggest that this tactic, among others, reflects an effort by the commission to prove how tough it is and defang Pitt's conflict-obsessed critics.
Pitt sharply disputes this.
"I have been a strong proponent of O&D bars since arriving at the commission," he says. "I would never encourage their use to force settlements, and I would never take a position" to neutralize critics.
Some private lawyers defend Pitt on this point, noting that the commission set out early on in Pitt's tenure to move aggressively against crooked officers and directors -- even at a time when Pitt was enjoying praise for his handling of the markets after the terrorist attacks in September.
"He was riding high then, and he was still going after O&D bars," says one securities lawyer.
Nonetheless, the toughness that Pitt and his enforcement team have demonstrated could undermine the SEC's reputation for fairness, according to both Pitt's defenders and his critics.
William McLucas, a Wilmer, Cutler & Pickering partner and former director of enforcement at the SEC, says that, with members of Congress and their constituents calling for corporate blood, the commission has to hew to principle. "This is the precise time when regulators need to work extra hard to be disciplined and restrained," McLucas says. "It's at times of crisis when the commission has a higher burden to ensure the process is scrupulously fair."
But Pitt is clearly in no mood to ratchet back his enforcement campaign. In a March 24 speech, he trumpeted the commission's recent suit against John Gallo, the former CEO of IGI Inc., a New Jersey-based animal vaccine and cosmetics manufacturer. The suit not only seeks a permanent O&D bar against Gallo, but also aims to recoup all the bonuses, options, and salaries he accumulated through his alleged fraud.
"This was a landmark effort by the commission's Enforcement Division, and we plan to continue to seek such disgorgement aggressively," Pitt said during the speech.
Friends and former colleagues suggest that Pitt's recent public relations miscues over private meetings with companies under investigation may stem as much from his own single-mindedness as from any outside influence. And lawyers who have worked at or practiced before the SEC for several years point out that Pitt is hardly the first SEC chairman to meet with the people he regulates.
According to one private securities lawyer with direct experience of the matter, former SEC Chairman Arthur Levitt Jr. regularly invited executives from SEC-regulated companies to meetings, including dinners at the private Cosmos Club. This lawyer says that a senior executive at one client company, which was then in the midst of an SEC investigation, received an invitation to such a dinner at the club.
Levitt did not reply to a request for comment late last week.
Several of Pitt's advisers within the SEC, who otherwise speak glowingly of their new leader, shake their heads when it comes to his meetings with KPMG executives and the CEO of Xerox. Pitt has been his own worst enemy since becoming chairman, these insiders say, acting with a tin ear for politics and a blind eye toward public perception.
"I always consider the advice of those around me, and I try to implement their suggestions," Pitt counters. "I do not blindly follow or reject the advice of others, but I do think for myself. We are in a political year, and people will find fault with anything I say or do if it suits their purposes."
After 34 years practicing as a securities lawyer, including 10 years at the SEC before he joined New York-based Fried, Frank, Harris, Shriver & Jacobson, Pitt says he sees himself at the apex of his career at a crucial moment. "I think it is likely to be the time of the most far-reaching changes in how we regulate our capital markets in the history of this country," Pitt says. "That is not hyperbole.
"We have a chance to do something meaningful and constructive for the next several decades that will change the face and the efficacy of our securities laws. This historic opportunity is one we cannot and will not let pass."
It remains to be seen whether Pitt will be remembered as the visionary who transformed what he saw as the crumbling hulk of securities regulations into a pyramid of clarity and simplicity. At the moment, his biggest challenge may simply be to persuade investors that he's championing their interests as zealously as he represented his former private clients.
As Celia Wexler, director of the Agency Watchdog Project at Common Cause puts it, "He has not yet given us a clear signal [that] this is Citizen Pitt."
Pitt Weighs In
On May 22, 2002, SEC Chairman Harvey Pitt was interviewed by Legal Times reporter Otis Bilodeau. Below are excerpts of their conversation:
On Enron:
When I came in I had an agenda of things I thought needed to be done. ... Enron has, at a minimum, accelerated my agenda. A lot of things I was worried about have come to pass, and Enron is a poster child for that.
In addition, while there have always been instances of large financial frauds and the like, this one has a number of characteristics that create a real need to rethink all of the issues.
We also obviously have an enforcement investigation, and when our Enforcement Division finishes, they will presumably make recommendations as to who the culprits are and who ought to be treated severely as a result of these events.
On yesterday's scandals today:
The problems we see with analysts are things that should have been handled long ago. This is not a new issue. Questions about conflicts for auditors should have been dealt with a long time ago. People may argue about how it should have been dealt with.
I think that the factors, the seeds of some of the things we're seeing now, were sown years and years ago and were ignored. So I think there's a lot of blame to go around. But as I see it the issue isn't who do you blame, the issue is: How do you solve the problem?
On disclosure in company reports:
Disclosure ceased being for the purpose of informing, and it started being for the purpose of evading liability. I had a friend who brought in a 1938 annual report from a glass company. This thing is not much bigger than this card, and the financial statements are on two pages, and this company had record earnings.
And it was wonderful. There was a paragraph that said, "We know we've had record earnings, but there's a lot more competition out there, the labor supply is tending to become more expensive and dwindling, getting raw material is going to be a problem. We don't think we can continue to earn money at this record pace."
Now in its simplicity, there was elegance. Somehow when you get to a 150- or 200-page disclosure document with footnotes that I guess at my age require a magnifying glass to read, and a lot more to comprehend, the system is no longer serving investors.
On being tough, and tender:
Before people make mistakes, you want to encourage them to come in and talk to you, and figure out for the right way to do it.
For the last -- Lord knows how many -- years, people have been afraid to come into this building. You have to have people believe that they'll get quick and investor-driven advice that's fair to everyone, but is mostly concerned with the protection of investors. That's the first step.
The second step is to come up with a regulatory regime that doesn't allow people to look at the words instead of the music. You have accounting principles, right, and the accounting principles, let's say, take 10 years to articulate. Of course, what happens during those 10 years? I mean, that's a disaster in itself. But in addition, when they finally get articulated, they have six, seven, eight hundred paragraphs.
On clamping down:
You need a vigorous, immediate enforcement program that says to people, "If you take a risk here, there's a really good chance you're going to be caught. And when you're caught, it will be swift, and it will be very, very hard."
So there are no easy ways out, for people to sort of say, "Well, if I get caught, I give back the money." That's one of the reasons we are pushing for [officer and director] bars.
On lawyers:
We don't target anyone, but we've had cases where, for example, we've seen insider trading by a partner in a law firm. And when that happens, the enforcement staff knows, we consider that an egregious bit of misconduct. Since I've been here, we've considered a number of cases involving lawyers where we've taken a relatively harsher approach. If you get corporate directors, or corporate lawyers who disserve their obligations to their clients or their shareholders, we get pretty apoplectic about that, and we tend to make those example cases.
I think if lawyers violate the law, we have an arsenal of things that will enable us to deal with them. But I think lawyers have more than a legal responsibility. This is something that the federal government has a hard time articulating. It's the same thing with analysts, brokers, accountants. It's not enough to follow the law. The law can tell you what's fraudulent, what's illegal.
What we want is to build on that two additional layers. One is ethics. We want the professions and the industries to ride herd on themselves and say, "Only the very highest standards will suffice." And then beyond that, we want competence as well.
On the pace of enforcement:
In the old days, people would sit there and ask, "Well, how can we turn this into the best case I can make it?" We want good cases, but now our enforcement staff understands that its first mission is to figure out, are investors being hurt, and how can I protect them?
You can protect them in one of two quick ways. You either stop the conduct immediately, and/or you get them some money if there are assets available.
So, again, if you look at our statistics, you'll see that we have exponentially increased the number of TRO proceedings, exponentially increased the number of asset freezes.
It's no longer: investigate for five or six years and then get some fine and don't do anything for investors. It's: why did you let that person dissipate the assets? The minute you see a fraud going on you've got to figure out who did it, why they're doing it, what assets are available. And you've got to do that first. Then you'll put the case together.
On his theory of regulation:
I sort of want to adhere to the Goldilocks theory, which is: just right. Not too soft. Not too hard. But hard enough so that people don't believe they can get away with anything in this market. And if that means that people will view us as too tough, that's a risk I'm willing to run. Anyone who worries that we may be too soft is making a huge miscalculation.
On media criticism:
I don't purport to understand all I read, and I certainly don't fret about what I can't control.What is important to the marketplace is that both investors and people who serve investors have a common understanding, and that is that there aren't going to be any free rides and there aren't going to be any easy rides.
I pay no attention as to somebody being a former client. That's what the importance of the word former is. They're not my clients anymore. And the people who serve them run the serious risk of great disappointment if they don't meet the highest standards.
That's the way I think people who pay attention to what we're doing see what we're doing. And my hope is that even the editors of The Wall Street Journal will come to that impression.
law.com |
