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Struggling with the legacy of his past

With accounting industry problems and corporate abuses flourishing, SEC chairman Harvey Pitt is under fire for what he has and hasn't done.

By MARY JACOBY, Times Staff Writer
© St. Petersburg Times
published May 19, 2002


WASHINGTON -- To understand the political dilemma facing Securities and Exchange Commission chairman Harvey Pitt in this post-Enron era, think of the free market he oversees as a home littered with beer bottles from hard-partying teenagers.

Liberties were taken, rules broken. But when it comes to cracking down on corporate abuses that led to major investor losses, Pitt's critics say he has been like the too-patient father who gently shakes his snoring kid on the couch, asking him to please be less rowdy next time.

A former securities lawyer with a long list of prominent business clients, the bearded, bespectacled Pitt has become a lightning rod for complaints that the Bush administration is too friendly with the securities industry to adequately police the markets.

Fair or not, this perception is one that Democrats are happy to exploit in an election year when control of Congress hangs in the balance.

In some instances, Pitt's own missteps have contributed to the controversy.

When it was disclosed two weeks ago that KPMG chairman Eugene O'Kelly met last month with Pitt, whose agency is investigating the accounting firm's questionable audits of Xerox Corp., top Democrats on the House Energy and Commerce Committee fired off an angry letter to Pitt.

"This is a critical juncture for the Commission, for the securities markets, and for the accounting industry," they wrote. "The integrity of the SEC and its proceedings is paramount."

But Pitt's supporters counter that his willingness to listen to all sides in a debate is being misconstrued as bias toward business.

"His advice has not been thumb your nose at the government," said his friend, John Olson, a Washington lawyer and a Democrat. "He's been very much motivated by a concern that people do the right thing."

Noting that Pitt started his career at the SEC, where he served as general counsel from 1975 to 1978, Olson said Pitt believes in the agency's regulatory mission.

"I think a lot of the criticism comes from people who have different agendas," said Olson, such as Democrats seeking political points and trial lawyers who would like to overturn a 1995 GOP-backed law making it harder to sue companies for securities fraud.

Still, as head of the agency charged with enforcing disclosure rules for public companies and protecting investors from fraud, Pitt, 57, is struggling with the legacy of his past. Among his former clients is accounting firm Arthur Andersen, now on trial in Houston on criminal charges related to the collapse of Enron.

As a lawyer, Pitt represented all Big Five accounting firms and their lobbying group, the American Institute of Certified Public Accountants.

For years, he helped those clients fight SEC proposals to tighten accounting standards. Now, accountants that helped companies inflate their revenues and boost their stock prices are being blamed for a string of corporate disasters that hurt investors.

In the wake of the business scandals, Pitt's agency has seemed to take a back seat to other regulatory bodies, fueling the criticism.

The Justice Department is pursuing a criminal case against Arthur Andersen, Congress is holding high-profile hearings on Enron, and New York Attorney General Eliot Spitzer is investigating analysts at former Pitt client Merrill Lynch for allegedly touting bogus stocks to clients to keep or attract investment banking business from the companies being praised.

"This is somebody who represented all the Big Five accounting firms and numerous other financial services clients with interests before the SEC, and now he's making decisions that will affect those clients," said Bill Allison of the Center for Public Integrity, a government watchdog group.

"It remains an open question" whether Pitt can now crack down, especially since he once argued for self-policing by the accounting industry, Allison said.

In a brief interview last week, Pitt said, "Criticism comes with the job. You have to learn from it. If it can help you improve the way you do your job, you have to take advantage of it."

He added: "It has certainly helped to make me see if there's more than I can do."

Pitt has moved more aggressively recently. In April, he said the agency would examine alleged conflicts of interest of stock analysts at Wall Street investment firms.

The SEC also is investigating a range of companies on allegations of inflated earnings, including telecommunications companies Global Crossing Ltd., Qwest Communications International Inc. and Lucent Technologies.

The agency is looking at Internet firms such as L90 Inc. and Homestore.com, and it is questioning energy trading techniques used by companies such as CMS Energy Corp., Dynegy Inc. and Reliant Resources Inc.

Pitt's more vigorous regulatory agenda may eventually improve his political situation. But questions about his ethics continue to arise.

The St. Petersburg Times reported Friday that Pitt remains in the room during closed-door commission meetings when matters involving former clients are discussed even though he has recused himself from acting on those issues. The previous SEC chairman, Arthur Levitt, made it a practice to leave the room when he recused himself.

Pitt still is contending with the fallout from the meeting with KPMG chairman Eugene O'Kelly last month.

The meeting came to light when O'Kelly sent an e-mail around the firm boasting he'd talked to Pitt about the SEC investigation of KPMG's Xerox audits.

Pitt insisted the topic did not come up in the 10-minute meeting. On Tuesday, O'Kelly backed off his story, saying he did not mention the Xerox matter by name.

Pitt's friend, Olson, has an explanation for the confusion: The SEC chairman is partially deaf. Pitt uses a hearing aid and may not hear a person who is not talking directly at him.

Many Washington veterans say they think the controversy over Pitt will soon pass. "This is a little brouhaha," said SEC commissioner Isaac Hunt, a Democrat. "It's not going to affect our ability to inspire confidence in the markets."

-- Information from Times wires was used in this report.

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