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Heat Builds for SEC Chief

Times Staff Writers

Securities and Exchange Commission Chairman Harvey L. Pitt faced a new torrent of calls for his resignation Thursday after reports that he did not disclose potentially inflammatory information about the man he picked to head the nation’s new accounting-oversight board.

William H. Webster, chosen last week to head the panel, chaired the audit committee of a financially troubled company that last year fired its outside accounting firm and has been sued by shareholders for fraud.

Webster told Pitt about the troubles at U.S. Technologies Inc. in advance of the commission’s decision Oct. 25 to appoint Webster, the New York Times reported Thursday. But Pitt didn’t inform other commission members before the contentious 3-2 vote, and the White House said it also wasn’t told.

The revelations immediately sparked a firestorm of outrage among Democratic legislators, many of whom have been critical of Pitt since he was appointed the top securities cop a year ago.

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At least one Senate Republican also said the Webster affair “raises questions” about Pitt’s conduct.

Pitt has repeatedly found himself embroiled in controversy over his behavior and his ties to the securities and accounting industries, which he served as a lawyer in private practice before President Bush tapped him to lead the SEC.

The SEC responded to the latest controversy Thursday by asking its inspector general to review the process by which Webster was selected.

An SEC spokesperson said that Pitt made the call, but that all five commissioners wanted the investigation.

Sen. Paul S. Sarbanes (D-Md.), who spearheaded the law creating the new accounting-oversight board, asked the General Accounting Office to launch a separate investigation.

At issue is whether Pitt, as the head of the agency that demands full disclosure from U.S. companies, intentionally withheld critical information from the other commissioners.

“Mr. Pitt is not behaving in a trustworthy manner that will bring credibility back to the market and restore investor confidence,” said House Minority Leader Richard A. Gephardt (D-Mo.). “I again urge President Bush to ask Harvey Pitt to step aside from his post today.”

A Pitt spokesperson said the staff of the SEC’s accounting division reviewed Webster’s tenure on U.S. Technologies’ audit committee but found that he had done nothing wrong.

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Webster, 78, is a former federal judge who directed the FBI from 1978 to 1987 and the CIA from 1987 to 1991.

“The staff, in reviewing his service on the audit committee, identified nothing of concern so there was nothing to pass on,” the Pitt spokesperson said.

Webster, who was named to the U.S. Technologies board in April 2000, did not return phone calls Thursday.

U.S. Technologies is a small Washington-based firm with stakes in a number of Internet-related companies. The company, which says it also operates industrial facilities in prisons, has recorded little in revenue and has racked up millions of dollars in losses, including a $1.8-million deficit in the first quarter of this year.

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Its stock trades for less than 1 cent a share.

The firm and its chief executive, C. Gregory Earls, face lawsuits from investors who said they were defrauded. A complaint filed against Earls in Superior Court in Washington accuses him of using investors’ funds for his own purposes, according to Bloomberg News.

In an interview Thursday, Earls defended the company, saying there was “no impropriety or wrongdoing” and that the lawsuits were without merit. He refused to discuss details of the allegations in the lawsuits.

Earls defended Webster’s role on the audit committee, saying “Judge Webster did a very good job for us. He was diligent. He was hands-on.”

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The audit committee, under Webster, fired BDO Seidman as U.S. Technologies’ accountants in August 2001. A month earlier, the auditors had raised issues about the company’s internal financial controls.

In a letter to the SEC last year, BDO Seidman said it told the company’s audit committee of what the accountants considered “a material weakness in internal control ... including lack of an experienced chief financial officer, deficiencies in recording material transactions timely, and in the organization and retention of financial documents and accounting records.”

Earls said BDO Seidman was replaced because it took too long to audit the firm’s books and because U.S. Technologies could no longer afford its fee.

A BDO Seidman spokesman refused to comment.

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The Webster episode marks the latest in a series of political missteps and controversial actions by Pitt.

A former securities lawyer who once represented the accounting profession and its top firms, Pitt caused an uproar this year when he held private meetings with accounting executives. That raised concerns that he was giving preferential treatment to former clients as they were coming under scrutiny in a wave of accounting scandals.

Most recently, Pitt endured withering criticism for his handling of nominations to the accounting board.

The creation of the five-member panel was the centerpiece of a landmark accounting-reform bill signed by Bush in July. The board is charged with annually reviewing large audit firms and disciplining accountants for wrongdoing.

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Lax oversight of accountants was blamed as a central factor behind the downfall of companies including Enron Corp. and WorldCom Inc.

The SEC was bitterly divided on Webster’s selection, with the three Republican members, including Pitt, backing him while the two Democrats favored John H. Biggs, a New York pension-fund executive known as an aggressive reformer.

Pitt initially offered the chairmanship to Biggs, sources said, but reversed course when the accounting industry and some congressional Republicans wanted a more moderate choice.

It was unclear what effect the revelations would have on Webster’s planned stewardship of the board, which by law must be in operation by the end of April. The White House said it continued to back Webster.

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But some experts said Webster’s affiliation with U.S. Technologies raised concerns about his judgment.

To lead the accounting panel, Webster must spot financial warning signs, an ability he did not exhibit at U.S. Technologies, critics said. “If this new board is going to have any credibility with the public, William Webster cannot be its chairman,” said Lynn Turner, a former SEC chief accountant.

The disclosure, coming just five days before the midterm elections to decide control of Congress, gave Democrats fresh ammunition in their efforts to force Pitt’s ouster. But it remained to be seen whether the latest crisis will prove politically fatal to him.

The White House repeated its backing of the SEC chairman.

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“Yes, of course we support him [Pitt],” White House spokesman Scott McClellan told reporters as Bush traveled to South Bend, Ind., for a campaign event. But McClellan added: “We don’t know the facts.”

And at least one Republican on the key Senate Banking Committee, Sen. Mike Enzi from Wyoming, said he was troubled by the belated disclosure about Webster’s previous corporate service.

“I have supported and will continue to support full disclosure when it comes to appointments of any kind,” Enzi, the only senator who is an accountant by training, said in a prepared statement.

“This lack of transparency raises questions in my mind that should be addressed by the White House.”

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Sarbanes, who sponsored the accounting reform bill as chairman of the Senate Banking, Housing and Urban Affairs Committee, said he was “deeply concerned that this process has gotten so markedly off track.”

But Sen. Phil Gramm of Texas, the Senate Banking Committee’s top Republican, defended Pitt.

“We have had the most relentless partisan attack on Pitt,” Gramm said, “I guess because the Democrats are desperate to try to make corporate malfeasance a campaign issue in Tuesday’s elections.”

He said Webster’s service on the board of U.S. Technologies was a matter of public record that Pitt couldn’t have hidden if he had tried.

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