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PITT AND THE PENDULUM:
THE HARD LIFE AND TIMES OF HARVEY PITT AT THE SECURITIES AND EXCHANGE COMMISSION

Professor Douglas Branson
University of Pittsburgh School of Law
JURIST Guest Columnist

The first thing a person should do when they have dug themselves into a hole is to stop digging. In his 15 month tenure, Securities and Exchange Commission Chairman Harvey Pitt never seemed to learn this lesson. Pitt dug himself into an abyss from which, ultimately, he was unable to extricate himself. On Election Day evening, 2002, he announced his resignation.

The young Harvey Pitt was a securities law boy-wonder. At age 30, he became the SEC痴 youngest ever general counsel, serving in that role from 1975 to 1978. He had a bit of the underdog about him as well. Somewhat of a Brahmin agency, the SEC had traditionally staffed itself with young lawyers from Harvard, Yale or Columbia. Harvey Pitt was a graduate of St. John痴 Law School in Jamaica, New York, an institution to which he remains fiercely loyal.

Following his initial SEC service, Pitt built up a reputation as a lion of the private securities bar over the course of 23 years as a partner in the Washington office of Fried Frank Shriver & Harris. His client list was the envy of his competitors. Pitt consistently earned over $3 million per year as one of Fried Frank痴 biggest producers and rainmakers. But, according to Pitt, he always harbored a secret ambition to accept a job which paid much less - Chairman of the SEC.

Soon after Pitt reported for duty as President Bush痴 SEC Chair the 土ear of our corporate governance discontent began. Enron unfolded and then imploded in the second half of 2001. Pitt and the SEC were criticized for not taking an activist role in avoiding the debacle. 典he SEC is riding on the back of the fire truck on this one, Professor Jack Coffee of Columbia opined.

Never mind that the SEC痴 primary mandate is to require disclosure. At least before the Sarbanes-Oxley Act of July, 2002, the SEC had no mission in the area of corporate governance per se. In fact, in Business Roundtable v. SEC, the SEC had had its hands slapped by a federal appeals court for attempting to regulate on a corporate governance issue. But onlookers wanted action by the SEC and, when it took no action, Pitt got blamed.

The Enron mess soon brought the large accounting firms under the microscope. While at Fried Frank, Harvey Pitt had represented all five of the 釘ig Five, Arthur Andersen included. Among other things, Pitt had helped the major firms to get the Private Securities Reform Act of 1995 passed by the Congress, an act which - while having little direct effect on the SEC - was not congruent with the SEC's interests. Because of those and other efforts, Pitt was widely viewed as 妬n bed with the major accounting firms.

Once at the Commission痴 helm, Pitt bent over backwards to prove he was not in bed with anyone. He recused himself from any matter dealing with the major accounting firms. But then he was 電amned if he did and damned if he didn稚. Because the Democrats on the Commission had resigned, at one point the SEC was down to two commissioners. When Pitt had to recuse himself in so many matters, the remaining single commissioner had no power to act. The Commission was thus paralyzed. Pitt was widely criticized for carrying so much baggage.

Then Pitt became seemingly tone deaf to conflicts of interest, or to the appearance of conflicts. In early 2002, Pitt had a one-on-one session with the CEO of accounting firm KPMG, at a time when KPMG was under investigation by the Commission staff. Later, in April, Pitt repeated his mistake. He met face to face with Xerox CEO Ann Mulcahy at a time when the SEC staff was conducting an ongoing high-profile investigation into whether Xerox had cooked the books. Shortly thereafter, Xerox paid a $10 million fine to the SEC.

The pendulum began to swing in the other direction with the Public Accounting Oversight Board appointments fiasco. The new board is a centerpiece of the Sarbanes-Oxley legislation. Creation and staffing of the five person board was to be on a fast track. The early favorite for the chair was John Biggs, the CEO of TIAA-CREF. Biggs is a stern corporate governance and accounting issue taskmaster. Because of that, however, the major accounting firms opposed him. Rumor had it that the accounting firms had found a back channel to Harvey Pitt, who reversed course, coming out in favor of William Webster, former federal judge, FBI director and CIA head.

By a divided 3-2 vote, the SEC commissioners confirmed Webster. Only later did Pitt reveal that Judge Webster had been on the audit committee of a high-tech company that the SEC was investigating for having cooked its books.

Pitt痴 failure to disclose was a serious breach of the trust that SEC Commissioners repose in one another. By tradition, the five Commissioners act collegially. They seldom, if ever, voted along party lines. For Harvey Pitt to have 菟ut one over on his fellow commissioners was a major transgression, resulting in a rising chorus of voices calling for Pitt痴 resignation. The pendulum swung and, so swinging, it knocked Harvey Pitt off his perch.

In many ways it is a Greek tragedy. Pitt rose up to achieve his lifetime dream, only to be felled by a fatal flaw. But precisely what that flaw may be is difficult to pinpoint. Pitt may be tone deaf when it comes to conflicts of interest and appearances. Some people are. Or, his weakness may have been that he tried to be all things to all people, making him be unable to say "no" to CEO Mulcahy or Judge Webster.

Now that Pitt is gone the Commission will be slowed in its work. Sarbanes-Oxley requires that the Commission implement many of it provisions through extensive rule-making. No one will make bold to do that until a new SEC Chair is in place.

Moreover, the SEC - clearly the best agency in government - has been tarnished by Pitt痴 bumbling, his non-disclosure to his fellow Commissioners, and so forth. But a tarnished SEC nonetheless remains head-and-shoulders above other federal agencies.

There do not really seem to be any lasting lessons to be learned here. Harvey Pitt will soon be forgotten. The SEC will bounce quickly back.


Douglas Branson holds the W. Edward Sell Chair in Business Law at the University of Pittsburgh and is the author of Corporate Governance (Lexis Law. Pub. 1993).

November 8, 2002

GUEST COLUMNIST

JURIST Guest Columnist Douglas Branson holds the W. Edward Sell Chair in Business Law at the University of Pittsburgh School of Law, where he teaches Corporations and Corporate Governance. Considered one of the top corporate law experts in the country, he is a prolific writer whose work has been described as the best "traditional" corporate scholarship currently being done. The most recent book on his impressive bibliography is the widely and favorably reviewed 1993 treatise, Corporate Governance.

Professor Branson's reputation as one of the country's most productive and thoughtful business law scholars has earned him an especially influential role in framing the highly prestigious American Law Institute's recommendations for corporate governance. In addition, he is considered the world's leading expert on the corporate law aspects of Alaska native corporations.

Professor Branson is a graduate of the University of Notre Dame, Northwestern University School of Law and the University of Virginia School of Law.