The Rittenhouse Review

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

Saturday, November 02, 2002  

The Writing is on the Wall

There are some harsh words for Securities and Exchange Commission Chairman Harvey L. Pitt from the Washington Post editorial board today, coming a day later than might have been expected, but no less scathing in their criticism of the agency’s Keystone Kop.

Last week, at an open SEC meeting, Mr. Pitt misled the public about the process of selecting a new board to oversee auditors, pretending he had not switched from a stronger candidate to a weaker one as a result of pressure from politicians or lobbyists. And reports this week suggest that Mr. Pitt withheld information from fellow SEC commissioners that would have compromised the lobbyists’ preferred candidate, William H. Webster, possibly even impeding his selection.

The SEC has now invited its internal inspector to inquire into the process that led to Mr. Webster’s selection, and Congress promises its own inquiries. If these confirm that Mr. Pitt withheld important facts from fellow commissioners as they prepared to vote on Mr. Webster’s appointment, Mr. Pitt ought to resign, or President Bush should replace him. Allowing Mr. Pitt to survive in office would signify the Bush administration’s contempt for business ethics.

Unfortunately, it’s not clear that Mr. Bush can be counted on to do the right thing, because his own advisers appear to have been complicitous in Mr. Pitt’s awful performance. White House staff were in touch with members of the commission during the period when the selection of the audit oversight board was hijacked by lobbyists. Andrew H. Card Jr., Mr. Bush’s chief of staff, called Mr. Webster to urge him to accept the job. Treasury Secretary Paul H. O’Neill was consulted on Mr. Webster’s appointment. . .

[T]he Bush team opposed the appointment of John H. Biggs, a champion of investor interests, as head of the newly created audit oversight board. Instead it supported Mr. Webster, whose weak grasp of the technicalities of accounting is reassuring to the accounting lobby. As a result of the administration’s choice, the new audit oversight board has had its credibility battered even before it gets going. There is still an opportunity to repair the damage -- unless the president decides that a battered and ineffectual regulator is exactly what he favors.

But more significant is today’s page-one article, “SEC Chief Losing White House Favor,” by David S. Hilzenrath and Mike Allen. I don’t know if Pitt is politically astute enough to grasp the significance of this piece, so I’ll just spell it out: Mr. Pitt, the writing is on the wall.

Based almost entirely on leaks from “Republican sources” and “SEC sources,” the Post today reported that “White House support for [Pitt] was deteriorating.” The mood in the White House sounds gloomy: “White House officials were said to be exasperated that Pitt’s handling of the appointments had created a political crisis for President Bush days before midterm elections that could determine which party controls Congress. These sources said the White House is considering asking Pitt to step down, or allowing him to resign, after the elections.” The Post notes that while President Bush cannot force Pitt’s departure, it can demote him out of the agency’s chairmanship, adding, “Pitt has few, if any, friends among Democrats in Congress to come to his aid.”

The paper reports the SEC didn’t learn of Webster’s role at U.S. Technologies Inc. before the vote, a fact pointed out to me late Friday by one of several particularly smart readers who e-mailed me with their comments and observations about the controversy. According to the Post, “SEC officials said yesterday that the search for accounting board members was so rushed and sprawling that the agency did not begin formal background checks on the candidates before its commissioners voted on the appointments last week.”

This is a strange statement. Although I can believe the factual matter presented here -- that the SEC was not fully informed -- I find the agency’s explanation bewildering. With a consistent drumbeat of support for the appointment of Biggs in the background, and clearly wounding the chairman’s ears, Pitt and the SEC staff appeared to be on little more than an “Anyone But Biggs” hunt. The implication, if I’m reading this properly, is that the SEC searched high and low for the most qualified individual for the job, an assertion that is thoroughly incredible.

We also see in today’s Post what may be an effort by Pitt’s supporters to shift blame to Robert K. Herdman, the SEC’s chief accountant and the man who reportedly “drove the selection process.” According to unnamed SEC sources, “Pitt asked Herdman to look into the U.S. Technologies matter. It is unclear what Herdman did to investigate.” Herdman, incidentally, is a former vice chairman of the accounting firm of Ernst & Young L.L.P.

The Bush administration remains in Pitt’s corner, at least publicly, albeit with obvious lack of enthusiasm. White House spokesman Scott McClellan yesterday said, “The president continues to support him in his efforts to crack down on corporate wrongdoing.” He emphasized, however, that the White House was waiting for the outcome of the SEC’s investigation. And according to at least one source, “Card believes Pitt embarrassed him by allowing him to call Webster and urge him to serve, without knowing about the potential vulnerability of his former service on the audit committee.” That’s really all it takes -- a leaked message from the White House Chief of Staff. We all have seen this before, time and time again: the actors change, but the script remains the same. And so, I say: Bye-bye, Harvey.

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