The Rittenhouse Review

A Philadelphia Journal of Politics, Finance, Ethics, and Culture

Thursday, October 31, 2002  

What Kind of an Idiot is Harvey Pitt?

Today while reading about the latest machinations of the chairman of the Securities and Exchange Commission, the question that kept arising in my mind was, “What kind of an idiot is Harvey Pitt?” I’m not quite sure I’ve answered that question to my satisfaction, or even whether it could be answered to my liking. That’s because Pitt is either a very special kind of idiot or just a garden-variety idiot, and neither is the type of idiot I would like to see running the SEC right now.

Pitt’s latest official act of stupidity was to force the appointment of former FBI and CIA director, former U.S. Circuit Court of Appeals judge, and Milbank Tweed Hadley & McCloy partner, William H. Webster as head of the new Public Company Accounting Oversight Board (PCAOB). Pitt selected Webster after having had a temper tantrum over talk that the spot should go to John Biggs, the retiring chief executive officer of TIAA-CREF. The SEC last week approved Webster’s selection on a 3-2, party-line vote as the commission’s two Democrats, Harvey Goldschmid and Roel Campos, complained that Webster lacked the financial experience and accounting expertise needed to head the board.

I too would have preferred to see the appointment of Biggs, or someone else of similar stature and experience, and I thought the selection of Webster, with its heavy emphasis on his past accomplishments in law enforcement, was a strange one. However, I certainly wasn’t disgusted to learn Webster would be taking the job, as I viewed him as a capable administrator and a man of integrity. This is, after all, the Bush administration, and we could do much worse, I thought.

I was surprised, then, to learn that Webster until July was a director at, and the chairman of the audit committee of, U.S. Technologies Inc., a once publicly traded and now insolvent firm that fired its auditor, BDO Seidman L.L.P., in the summer of 2001, after the accounting firm complained of material weaknesses in the company’s internal accounting controls -- not exactly the likely initial response of the highly principled. U.S. Technologies since then has been slapped with numerous shareholder lawsuits alleging fraud arising from inappropriate accounting methods and disclosure policies.

According to media reports, Webster informed Pitt and other SEC staff members, including Chief Accountant Robert Herdman, of the controversy at U.S. Technologies. But Pitt saw no potential problems associated with the legal troubles at U.S. Technologies that arose while Webster was heading the audit committee, a position he held for a year beyond the firing of BDO Seidman. As a result, Pitt went forward with his previously established plan to push the Webster appointment through the SEC.

The SEC’s spokespeople are, at the very least, hinting that Pitt’s conclusion was shared by commission staff members. Compounding the matter exponentially, Pitt in his infinite wisdom or unparalleled arrogance did not inform his fellow commissioners of the controversy, nor did he report the matter to the White House, according to the New York Times. Needless to say, none of these uninformed parties was pleased, nor were leading congressional Democrats who today renewed their call for Pitt to resign.

Resignation is not, however, the type of honorable action that would ever cross Pitt’s mind, at least this side of an indictment, I suppose. Instead, today the SEC chairman asked the agency’s inspector general, Walter Stachnik, to investigate Webster’s selection and the role Pitt played in the process. (Strachnik will be joined in the investigation by SEC General Counsel Giovanni Prezioso.) Despite this move, it appears Pitt views the entire situation as little more than an annoyance; his spokesman told reporters today, “In reviewing the situation with respect to Judge Webster’s service on the audit committee of U.S. Technologies, the commission’s staff identified nothing of concern regarding that service.” [Emphasis added. Note the shifting of blame going on here.] That statement says much about the commitment of the Bush administration to the myriad policies, proposals, and outrage floating around under the general rubric of “corporate reform.”

James D. Cox, a Duke University law professor quoted in the Times, nails Webster’s culpability here:

Even if we find out that Webster was totally passive in this process, it is an indictment on his ability to run the accounting oversight board. To let something like this go shows really bad judgment, and I think is automatically disqualifying. At a minimum, the audit committee had an obligation to investigate. This is exactly the kind of situation that the accounting oversight board is supposed to change, and that the new law creating the oversight board is supposed to fix.

That Pitt could not see this failure for what it is, and thought nothing of continuing to support Webster despite this, demonstrates an unconscionable degree of stupidity and a mindset that is clearly outside the boundaries of normal ethical considerations.

I say that with some trepidation. Time and again I have made the mistake of assuming this or that member of the Bush administration or the Republican Party or the Bush family entourage is stupid, and perhaps by asking myself exactly what kind of idiot Harvey Pitt is, I’m committing the same error again. Maybe Pitt isn’t so stupid after all. His support for, and appointment of, the highly questionable Webster is a major setback for the PCAOB, both to the board’s ability to begin the much needed work of improving public-company accounting practices and financial reporting and to its standing in the eyes of the public. The Bush administration is not serious about corporate reform, and that’s the thought that should have preoccupied me this afternoon.

It’s time, Mr. Pitt, for that phone call to managing partners Peter v.Z. Cobb and Michael Rauch. Don’t by shy, the boys at Fried Frank probably kept your old office open. After all, they knew you better than we did.

ADDENDUM: This entire situation begs the question, why didn’t anyone in the media break this story before the SEC voted on Webster’s appointment last week? I presume Webster’s affiliation with U.S. Technologies was included in the biographical material submitted to the SEC. It should have been known to reporters covering the agency. It was a matter of public record. Did not one reporter there, or at the White House, think to perform even the most cursory of research about the company at which Webster chaired the board of directors’ audit committee? Come on, people, I can’t do this all myself.

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