Harvey Pitt gets the grilling his predecessor was due.
July 8, 2002, 8:45 a.m.
The Pitts
nationalreview.com
By John Berlau
> Poor Harvey Pitt just can't catch a break. The former Washington securities lawyer appointed by President Bush as chairman of the Securities and Exchange Commission last year has taken a beating from the press because he has the nerve to question sweeping new regulations touted as a cure-all for Enron. When Pitt criticizes proposals such as forcing accounting firms not to offer consulting services to firms they audits, the press strongly hints that he doesn't want to risk offending his friends and former clients. "Pitt's close ties to Wall Street make many wonder if his SEC will really push reform," reads a caption by Pitt's photo in a recent article in Time magazine.
Nearly every article also compares Pitt to his predecessor, President Clinton's SEC chairman Arthur Levitt Jr. Levitt also has "close ties" to Wall Street. He served as chairman of the American Stock Exchange from 1978 to 1989. Yet he gets fawning press coverage. Levitt "was an outspoken champion of the small investor," coos the same Time article.
Levitt is the one of the prime champions of many of the proposed post-Enron regulations such as taking away tax deductions from companies that don't treat stock options as an expense and banning auditors from consulting for the companies they audit. Although Pitt has called for and instituted tougher oversight, he believes an outright ban on auditors offering consulting services would be unnecessary and stifle innovation. But the media can't accept that this and resistance to other proposed regulations justified as preventing the next Enron is a principled ideological conviction. They hint that Pitt must be helping out his old Wall Street buddies.
Yet, putting aside his rhetoric about championing the small investor, a closer look at many of Levitt's actions show that Levitt is actually the one who unapologetically used his position as SEC chairman to benefit a specific group of his political and business cronies. What's more he often did so, ironically, in the name of fighting corruption.
Pitt has been taken to task simply for meeting with the head of a firm that used to be his client. In April, he met with Eugene O'Kelly, the new chairman of the accounting firm KPMG, which Pitt had done legal work for and which is under SEC investigation for its audits of Xerox. Pitt disputed that there was any discussion of the ongoing probe, but says he'll refrain from meeting with officials of firms under investigation in the future to avoid appearance problems. However, there is no evidence that Pitt has done anything to help out his old client in the investigation.
By contrast, during his tenure, Levitt, a big-time Democratic fundraiser before he came to the SEC, regularly and unapologetically pushed to get his old political and business associates on the boards of stock exchanges and private financial regulatory bodies. According to a 1997 article in Business Week, Levitt "played a role filling in dozens of exchange, advisory and regulatory positions."
Levitt's SEC opened a case against the Philadelphia Stock Exchange after its chairman was alleged not to have disclosed an ownership interest in a company chosen to modernize the agency's technology. Levitt, according to Business Week, came down hard in 1997 and demanded that the agency restructure its board so that half its members were outside directors that represented the "public interest."
But Levitt went further than any previous SEC chairman by recommending, and some say demanding, his own choices for membership on the board of a private stock exchange. According to Business Week, "he provided a list of acceptable names, many of whom now sit on the board after getting calls from Levitt." One board member of the Philadelphia Stock Exchange, who spoke on condition of anonymity, told me that existing board members were told to appoint Levitt's choices for the "public interest" slots, or else "Arthur will shut you down." Levitt has not responded to any of my repeated inquiries for articles I have written for Insight magazine.
What makes Levitt's actions all the more suspect is that many of the new board members of the exchange were hardly what many would think of as representing the "public interest," unless this interest perfectly coincided with that of the Democratic party. The new board members included Jack Quinn, former counsel to President Clinton who would again defend Clinton during his impeachment trial and lobby the president successfully to pardon the fugitive Marc Rich, and Ed Rendell, former Philadelphia mayor and Democratic National Committee chairman who is now running for governor of Pennsylvania. The current chairman is former real-estate executive Sandy Frucher, a friend of Levitt who is also a longtime adviser and fundraiser for New York Governor Mario Cuomo and is currently, according to the New York Observer, pitching in for Mario's son Andrew in his gubernatorial run. "Frucher arrived with a long history of bare-knuckle political jobs, but no securities credentials except his links to Levitt," wrote the Philadelphia Inquirer in 2001.
Frucher was a companion of Levitt on the Outward Bound annual wilderness trips taken by business executives, and Levitt has admitted that he pushed for Frucher to serve on the stock-exchange board. "I thought the perspective of someone outside the industry would be a great additive to an industry that suffered from old habits, old ideas and old governance," Levitt told the Philadelphia Inquirer. "In addition to which, he has many creative ideas."
Stock-exchange board members have a lot of power, and the business contacts Quinn, Frucher, and Rendell have made by serving on the Philadelphia stock-exchange board are probably coming in handy now as Rendell is running for the Pennsylvania governorship and Frucher is helping Cuomo get the top job in New York. (The Philadelphia Stock Exchange has recently appointed one token Republican to its board, former Sen. Larry Pressler, who is running for the at-large House seat in South Dakota.)
Before he went after the Philadelphia Stock Exchange, Levitt also insisted that the National Association of Securities Dealers, which runs the NASDAQ stock market, restructure its board to have substantial "public interest" representation as a remedy for the alleged price fixing of some of NASD's broker-dealers. And once again, Levitt apparently had a strong say in who these new board members would be. The new chairman of the NASD, Frank Zarb, picked by Levitt according to Business Week, had worked for Levitt at a Wall Street trading firm.
Experts say that an SEC chairman picking members of a stock exchange or private regulatory body creates inherent conflicts of interest and hurts the system of checks and balances in financial regulation. "If the chairman of the SEC picks board members for the self-regulators, and then the self-regulators don't do something right, he may find himself in an awkward position if he has to try to punish the guy he put in there," says Junius Peake, a professor of finance at the University of Northern Colorado and former NASD board members. Levitt's SEC and the NASD pursued policies in sync with each other that reversed Reagan-era reforms that had made it easier for small businesses to raise money in the capital markets. Cutting off small business from this source of capital may have contributed to the current slowdown, argues economist Brian Wesbury and other experts.
Pitt's alleged offenses pale when compared to Levitt's rampant cronyism, but the media have largely let Levitt's favoring of his friends escape notice, probably because they consider him to be on the "right side" of regulatory issues. It should also be noted that most of the shenanigans of Enron and WorldCom took place under the watch of Levitt, not Pitt. Levitt's actions should not affect the merits (or lack of them) of the arguments for banning accounting firms from consulting or taxing stock options that aren't expensed. But neither should Pitt's alleged "close ties" to Wall Street be used by the press to taint sensible free-market arguments against these new regulations.
? John Berlau, a writer for Insight magazine, is the recipient of the National Press Club's 2002 Sandy Hume Memorial Award for Excellence in Political Reporting. |
