News Column

Besieged Pitt Quits as SEC Chairman

November 6, 2002

David S. Hilzenrath and Mike Allen

Harvey Pitt steps down as SEC chairman.

Securities and Exchange Commission Chairman Harvey L. Pitt resigned yesterday after just 15 months on the job, under pressure from the White House.

In a letter to President Bush, Pitt said that "the turmoil surrounding my Chairmanship" was making it difficult for the nation's securities regulator to do its job.

"Rather than be a burden to you or the Agency, I feel it is in everyone's best interest if I step aside now," Pitt said. The SEC released the letter at about 9 p.m. as the nation was focused on election returns.

It was the end of a short, tumultuous tenure and a spectacular fall for Pitt, whom one Democratic senator acclaimed during his confirmation hearing last year as the "Zeus of his field."

For the Bush administration, which had stood by Pitt through past controversies, the last straw was Pitt's handling of the appointment of former FBI and CIA director William H. Webster to head a new board mandated by Congress to clean up the accounting industry.

Pitt failed to inform fellow commissioners or the White House that Webster chaired the audit committee of a company with accounting problems, embarrassing White House Chief of Staff Andrew H. Card Jr., who had urged Webster to accept the job.

The appointment of the oversight board was one of the SEC's most important tasks in years, meant to restore investors' trust in corporate financial reports after a series of accounting scandals at companies such as Enron and WorldCom helped erase billions of dollars of shareholder wealth.

For weeks, congressional Democrats had been clamoring for Pitt to resign, accusing him of giving the accounting industry undue influence over SEC decisions. As a lawyer in private practice, Pitt represented each of the Big 5 accounting firms and their main lobbying group.

Pitt told Bush his resignation would take effect "as soon as I can help your Staff ensure a smooth transition of leadership."

White House officials said Pitt had sent the message through staff members a few days ago that he was considering resigning. A senior official said Pitt notified an aide in the presidential personnel office early yesterday evening that he "had made the decision to step aside," and the aide did not object. Shortly thereafter, Pitt sent his letter to the president. The resignation was immediately accepted, the official said.

"All things being equal, he probably made the right decision," said Senate Minority Leader Trent Lott (R-Miss.). "You need someone who has the confidence of the people, and he had clearly lost that, fairly or unfairly."

Pitt's departure throws into question whether Webster will remain to head the accounting oversight board. He had been approved on a party-line vote at the SEC a week ago.

By securing Pitt's resignation on election night, the president may have hoped news of the first high-level ouster of his administration would have been lost in the shuffle, a senior GOP Senate aide said. But that is not likely, especially if more members of the Bush economic team head for the exits, the aide said.

White House sources said they were surprised at the timing but were very relieved. The sources said Card, the chief of staff, was furious at Pitt for not alerting him to the information about Webster. They said Pitt soon would have been told he did not have the support of the president if he had failed to take the numerous public hints from Bush's aides.

Pitt has said he had aspired his entire professional life to be SEC chairman. He was the youngest general counsel in SEC history. He later left the agency and established a lucrative practice as a securities lawyer, advising Wall Street firms and defending high-profile executives such as takeover arbitrageur Ivan Boesky in the 1980s and MicroStrategy Inc. chief executive Michael J. Saylor in SEC investigations.

But it was his long association with the accounting industry that raised questions, coming as it did amid an unprecedented number of accounting crises. Pitt's critics accused him of coddling his former clients and resisting meaningful reform of the accounting industry.

An SEC spokesman said last night that Pitt was not granting interviews.

Bush appointed Pitt at a time of heightened concern about financial fraud and the performance of corporate auditors. Pitt's predecessor, Clinton appointee Arthur Levitt Jr., had been an impassioned critic of the industry and fought with only limited success to tighten regulation of it, encountering fierce opposition from the accounting lobby and its allies in Congress.

From the beginning of his term, Pitt planted doubts about his political judgment and intentions. In his first formal speech as chairman, Pitt promised accounting industry leaders "a new era of respect and cooperation." In an interview after the speech, Pitt said he was trying to make the SEC "a kinder, gentler place for everyone."

After the terrorist attacks of Sept. 11, 2001, which brought devastation to New York's financial district, Pitt helped coordinate the reopening of the nation's stock markets.

The challenge facing Pitt and the investing public changed profoundly later in 2001, when Enron Corp., one of the nation's largest and most respected companies, imploded in an accounting scandal. The Houston-based energy trader inflated its income and hid vast debts in off-the-books partnerships. As Enron's auditor, Arthur Andersen LLP had blessed years of misleading financial statements.

As Congress set to work crafting legislation to increase corporate accountability and tighten regulation of accountants, Pitt made it clear he thought the agency could do the job itself. One morning in June, as the Senate Banking Committee was about to vote on a bill by Chairman Paul S. Sarbanes (D-Md.), Pitt huddled with Republican members of the committee, advising them that there was virtually no need for legislation.

During the summer, as House and Senate negotiators finalized the bill, Pitt asked lawmakers to elevate him to Cabinet rank. The White House joined other critics in dismissing the idea, and one top official said it was perceived in the White House as "goofy."

Pitt was accused of faulty judgment for meeting with the head of an audit firm that was under SEC investigation. He promised members of Congress that he would avoid the appearance of impropriety in the future under such circumstances. But he recently met with the head of an investment bank under SEC investigation, prompting a new round of criticism from Capitol Hill.

As the accounting scandals deepened this summer, Pitt ordered top executives to formally certify the accuracy of their financial statements.

The Sarbanes-Oxley Act that Congress overwhelmingly approved in July created a new oversight board to police and regulate auditors of public companies. That precipitated the greatest crises of Pitt's chairmanship.

Pitt joined a Democratic commissioner in recruiting pension fund executive John H. Biggs to chair the board. But accounting firms strongly objected to the choice of Biggs, a vocal advocate of auditing reform.

Pitt changed course and supported Webster for the job in a bitter 3 to 2 vote of the SEC commissioners on Oct. 25. The appointment of Webster, 78, who played no role in the debate over accounting reform and had limited knowledge of auditing, led to an outcry that Pitt had caved in to his former clients in the accounting industry and tainted the fledgling board's credibility.

The SEC chairman defended himself in an emotional statement at the open meeting, saying, "I am beholden to no one."

Some sources close to the process said Pitt rejected Biggs at least partly because he deeply resented the pressure brought to bear on him by supporters of Biggs, including his predecessor, Levitt.

The controversy over Webster's choice was soon eclipsed by the news that Pitt failed to inform fellow commissioners about Webster's service as audit committee chairman at U.S. Technologies Inc., a D.C. firm that allegedly fired its auditor after the auditor highlighted problems with its accounting controls. That strained President Bush's habitual loyalty to appointees and the goodwill of a White House staff that insists on no surprises.

Pitt faces multiple investigations, including Senate hearings into the matter.

Pitt's support had also eroded on Wall Street, where some executives saw him as a weak leader.

In a recent speech, Pitt gave his own assessment of the SEC under his leadership. Since last fall, he said on Oct. 22, the agency "launched the most aggressive reform agenda in our history."

"The corporate scandals and collapses were a catalyst that spurred us to accelerate and broaden our efforts. We recognized that the system of self-regulation of the accounting profession was broken beyond repair. We embarked on long-needed disclosure reforms to improve the quality and increase the timeliness of disclosure. We called on the New York Stock Exchange and Nasdaq to improve corporate accountability and corporate governance through strengthened listing standards."

The SEC filed a record 598 enforcement cases in the fiscal year ended Sept. 30, up 24 percent from the year before, including increased efforts to recover ill-gotten gains and ban offenders from serving in corporate boardrooms, Pitt said.

"I'm enormously proud of our accomplishments, our regulatory reforms and our enforcement program. They have been aggressive, creative, well focused and effective," Pitt said.

In his resignation letter, Pitt told Bush, "I am pleased I was able to play a role in starting to restore investor confidence."

Staff writers Kathleen Day, Jonathan Weisman and Mark Leibovich contributed to this report.

Source: © 2002 The Washington Post Company

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