Pitt’s Revised Agenda
In October, Securities and Exchange Commission Chairman Harvey L. Pitt uttered three words that he’s been trying to live down ever since.
In his first official speech since taking office two months earlier, Pitt indicated to a gathering of accountants that he wanted a “kinder and gentler” SEC that would be less combative with the firms it regulates.
Barely a month later, Enron Corp. disintegrated in a heap of financial misdeeds, and Pitt was mobbed by criticism that he was too cozy with the accounting industry and was failing to put investors’ interests first.
Few SEC chairmen have become embroiled in controversy as early in their terms as the 57-year-old Pitt, whose appointment as head of the nation’s market regulatory agency fulfilled his long-held dream.
Now, the question is how Pitt’s trial by fire will affect his ability to shape the agency, and securities regulation, at what is a watershed moment for both.
The calls for change that have rung out in the wake of the scandal-ridden failures of Enron and Global Crossing Ltd. offer a chance to etch the most substantive market reforms since those that followed the Great Depression, some say.
But Pitt’s early image problems complicate his task of navigating between a skeptical public and a Congress agitating for action, while staying true to his own beliefs and those of the conservative president who appointed him.
What’s more, Pitt’s SEC staff of 3,000 is suffering heavy turnover and sagging morale and is, by his own estimation, underpaid and lacking critical resources.
On Thursday, Pitt implored Congress to free up $76 million to boost SEC salaries, and an additional $15 million to hire 100 more lawyers and accountants to handle the more aggressive market oversight that lawmakers and the public now demand.
“Clearly, this is a historic opportunity to do a lot,” said Patrick McGurn, vice president at Institutional Shareholder Services, an investment-consulting firm in Rockville, Md. “Historic opportunities don’t come around too often. The question is whether Pitt’s commission has been so wounded that it has to spend all its time nursing itself back to health.”
From the moment he was tapped by President Bush in July to be the 26th SEC chairman since the agency’s founding in 1934, Pitt made clear that he would differ in philosophy, and style, from the man he succeeded.
Former Chairman Arthur Levitt Jr.’s heated clashes with the accounting and securities industries carved his reputation as a fierce advocate for small investors.
The Brooklyn-born Pitt, a renowned securities lawyer whose career began in 1968 with a decade-long stint at the SEC, sought more of a middle ground: He said he wanted to improve corporate financial disclosure while also easing regulation on some fronts--for example, by streamlining the process by which big companies sell securities in capital markets.
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A Greater Urgency for Reform Agenda
In a recent interview with The Times, Pitt said the Enron debacle had not changed his mind about the agenda he originally wanted to push at the SEC. Rather, he said he saw a greater urgency to speed its implementation.
At the top of his list, he said, were raising SEC staff pay and gaining the legal authority to prevent executives or directors who engage in wrongdoing from working at other companies.
However, Pitt also said any and all reform ideas were now on the table--a concession that would have seemed unlikely pre-Enron.
On Thursday, Bush gave Pitt’s program a strong endorsement when the president unveiled a financial-reform package that closely tracks many recent Pitt initiatives. For example, Bush wants to expand the list of significant events that companies must disclose immediately to the SEC and investors. He also proposes speeding up insiders’ reporting of personal stock transactions.
Almost “every one of these is something that emanates from recent SEC proposals under Harvey Pitt,” said John Coffee, a Columbia University law professor. “The president has turned to him and said, ‘What are the [policies] we can endorse without undercutting our own constituency?’ ”
Some analysts said it was notable that Bush’s plan excluded a suggestion from Treasury Secretary Paul H. O’Neill that Pitt was known to oppose: O’Neill wanted to make it easier to punish executives by lowering the legal standard for wrongdoing from intentional “recklessness” to simple “negligence.” Pitt and some others feared that would spur additional litigation against companies.
Some critics continue to deride Pitt as kowtowing to the big accounting firms that he once represented as a private lawyer, and say his reform proposals are too modest to prevent more Enrons in the future.
Pitt jabs back at his critics, saying people have twisted his words.
“There are a lot of people who are afraid that they will be saddled with the blame for [Enron], so the best defense is a good offense,” Pitt said. “The notion is to go on the attack and question the integrity of people who are actually serious about solving the problem.”
Pitt said he still was seeking to establish a tone of respect and cooperation with those the SEC regulates. That doesn’t mean the agency would go lightly on wrongdoers, he said.
Working with industry “does not mean that we have gone, or will go, ‘soft’ on securities violations or financial fraud,” he told a lawyers group in early November, before Enron exploded.
“The fact that I was willing to listen to people and hear their ideas and try to respond to them didn’t mean that anybody could get away with anything,” Pitt told The Times.
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Pitt Concedes He Made Some Gaffes
Some say they are surprised that Pitt, a Washington insider, seemed initially to not notice the furor that his words and actions were stirring.
“This is a guy who everybody called one of the power brokers in Washington, and he showed himself to have a rough touch,” McGurn said.
Pitt, well-respected for his sharp intellect and for his work ethic, concedes that he has stumbled in trying to get his message across.
“I fault myself for not having communicated the way people are required to communicate in significant public office and in Washington. I’ve lived in Washington 33 years, and my approach to life was somewhat a throwback to being a lawyer. Of course, now I understand quite well that not only am I a lawyer ... but I’m a policymaker and I have to communicate as a policymaker. That is an area where I could have done a lot better.”
Post-Enron, he has displayed a notably toughened tone about the SEC’s mission--in part, experts say, to head off Congress from usurping his agenda with legislation.
“He has been working hard to reposition himself,” Coffee said. “He’s tried to find some new issues to get out in front of.”
Pitt has, for example, said disgraced executives and directors should be made to give up any ill-gotten stock gains. And he has admonished accountants and lawyers to follow the spirit, not simply the letter, of the law.
Pitt, whose father worked at a supermarket delicatessen, wasn’t born into Wall Street’s culture. His image as someone closely tied to the securities industry stems from the roster of clients he defended in 23 years in private practice at New York law firm Fried, Frank, Harris, Shriver & Jacobson.
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Critics Point to Private-Sector Ties
His clients included the infamous insider trader Ivan Boesky, each of the Big Five accounting firms and the accounting industry’s chief trade group, the American Institute of Certified Public Accountants.
As an attorney for the trade group in the 1990s, Pitt successfully beat back a plan by Levitt to bar accountants from consulting work that could conflict with their audits.
Despite the broad support that idea has generated in the aftermath of devastating revelations about Enron’s auditor, Andersen, Pitt says he still doesn’t favor it, labeling it a “simplistic solution to a complicated problem.”
“One of the things that people are missing in all of this is that a firm that only does audit work becomes more dependent on its audit clients, not less dependent on its audit clients,” he said. “Firms that have multiple sources of income can afford to be more independent. It just means you have to make sure that they don’t have any ambiguity in where their loyalties lie.”
That stance hardens the view of critics who say he puts his private-sector clients first. Pitt, in turn, has become visibly angry when responding to that allegation.
“Lawyers represent clients, but they [lawyers] aren’t the clients,” he said. “The notion that people wanted to attribute the views of my clients to me disserves everyone.”
Before Enron collapsed, Pitt won high marks for his first challenge as SEC chairman: soothing markets and helping quickly relaunch stock trading after Sept. 11. He coaxed rival brokerages to share office space to get Wall Street functioning again and displayed a cool behind-the-scenes demeanor.
But by October and November, Pitt was out front with proposals that instantly raised the hackles of Washington insiders and others who feared the SEC’s watchdog function would be weakened.
For example, the SEC introduced a policy in October under which it promised to consider lighter penalties--and in some cases no penalties at all--for companies that voluntarily disclosed financial wrongdoing and took steps to make amends.
After Enron crumbled and attacks on the accounting industry mushroomed, Pitt in January unveiled what would be his most controversial plan so far: the formation of a new oversight organization to monitor accounting firms.
Detractors, including some Republicans in Congress, say Pitt’s idea for a new oversight board is woefully inadequate. Pitt said this new board would have strong disciplinary power, but opponents say it would be controlled by the accounting industry. Even archconservative Sen. Phil Gramm (R-Texas) took aim at Pitt’s idea.
The uproar increased when it was revealed that Pitt drew up his proposal after a series of private meetings with the accounting firms he once represented.
Pitt’s supporters say his intentions and methods have been portrayed unfairly. Whereas Levitt scrapped with the accounting industry, Pitt is seeking reform through a cooperative approach, his backers say.
“He’s a guy of tremendous integrity,” said Stanley Sporkin, a former federal judge who worked with Pitt at the SEC in the 1970s. As for Pitt’s overtures to accountants, “it wasn’t in any way an attempt to curry favor with those folks. That’s not how he works,” Sporkin said.
As a private attorney, Pitt routinely pressed clients to do what was ethically proper, not just what was legally allowable, said Dixie Johnson, a partner at Fried Frank.
“I’ve seen him inspire clients to do the right things many times,” Johnson said. Pitt also dumped at least five or six clients in the last decade over ethical clashes, she said.
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‘It Is a Moment to Be Seized’
On a personal level, Pitt was a demanding but sympathetic boss, Johnson said. With Pitt’s support, Johnson took three months off in 1988 to care for her dying mother, she said. When she stayed away longer than expected, Johnson offered to have the firm discontinue her salary during her absence. Pitt rejected the idea.
Despite the turmoil that has marked his seven months in office, Pitt, a movie buff, said he remained thrilled with his job, even if others say he has been forced to partly rewrite his script.
Pitt is aware that his legacy may depend in large part on his response to Enron and its aftermath.
“As terrible as Enron is, it is a moment to be seized,” he said. “We have to move and move quickly to protect public investors. Enron gives us the impetus to make sure we do that and we do that quickly.”
“There isn’t anything that I have ever done that I don’t think I can do better. No matter what anyone else says, I always believe that I can learn and improve. In that sense, I’m my own worst critic.”
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(BEGIN TEXT OF INFOBOX)
Harvey Pitt’s Inside Track
Born: Brooklyn, N.Y., Feb. 28, 1945.
Personal: Married, with four children.
Education: BA, Brooklyn College, 1965; JD, St. John’s University Law School, 1968.
Career: 1968-1978: Various positions at the Securities and Exchange Commission, including staff attorney in the office of general counsel; legal assistant to SEC Commissioner Francis M. Wheat; special counsel in the office of general counsel; and general counsel from 1975 to ’78.
1978-2001: Private attorney, Fried, Frank, Harris, Shriver & Jacobson.
2001-present: Chairman, Securities and Exchange Commission. Salary: $138,200.
Other positions: In the 1970s and 1980s, served as an adjunct professor of law at Georgetown University Law Center, George Washington University Law School and the University of Pennsylvania School of Law.
Founding trustee and president of the SEC Historical Society.
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Source: Securities and Exchange Commission
