Commentary: A Regulator with His Own Conflicts of Interest

By Gary Weiss

In his two decades of dedicated service to an array of corporations, Securities & Exchange Commission Chairman Harvey L. Pitt won renown as a legal scholar. But that expertise came at a price--a close identification with the interests of his clients. Controversy rages over Pitt's history of legal work for Big Five accounting firms, including Enron (ENE ) auditor Arthur Andersen, which threatens to undermine his leadership in formulating accounting reforms. And Pitt's conflict-of-interest nightmare may only be just beginning.

As a partner in the Washington law firm of Fried Frank Harris Shriver & Jacobson, he represented firms and individuals throughout the financial-services industry. Although most previous SEC chairmen had worked on Wall Street or were securities lawyers, Pitt's practice was unique in its sheer size and scope. Securities lawyers say that Pitt thus faces actual or apparent conflicts of interest--either can be just as troubling--on a host of issues. Another constraint is equally daunting: Legal ethics forbid him from acting on information he obtained from ex-clients. "It's impossible to see Harvey Pitt as anything but Prometheus bound. Pitt is shackled to a rock, and the harpies are going to come and pick his guts out," says Bill Singer, a New York securities lawyer.

The heart of his future difficulties can be found in a single-spaced, six-page document that Pitt filed with the U.S. Office of Government Ethics on May 24, 2001, after he was nominated to the SEC. It lists Pitt's 112 clients during the preceding two years. Apart from the Big Five accounting firms, the list includes major banks, the mutual-fund and securities industry trade groups, brokerages such as Bear Stearns and Morgan Stanley Dean Witter, the New York Stock Exchange, hedge fund titan Dawson Samberg, and corporations such as media giant America Online and its Chairman Stephen M. Case.

Virtually all could be affected by SEC work in the coming years. The NYSE is vitally interested in issues affecting its heated competition with Nasdaq and electronic trading networks. Charles Schwab (SCH ) and Datek Online closely follow issues affecting online trading, and Nasdaq market making giant Knight/Trimark Group has pressed the SEC not to curtail payments for order-routing, and weighed in on other trading issues.

Pitt has dealt with potential conflicts by hewing strictly to the law. His spokesperson, Christi Harlan, notes that "people can always believe that there is the appearance of a conflict of interest, but in [Pitt's] agreement with the Office of Government Ethics he has agreed not to be involved in any matter involving former clients for a year [ending in August], which is what the law requires."

But potential conflicts won't go away just because Pitt is following the rules. If he takes action concerning former clients--even clients from years ago, not on the list--after August, lawyers say he may be seen as either favoring them or bending over backwards to do otherwise.

Either way, you "lose the moral high ground," says one securities lawyer. "You want to avoid the appearance of a conflict as well as a real conflict," says Ira L. Sorkin, a former SEC regional administrator and now a New York securities lawyer. Sorkin notes that while he has confidence in Pitt's fairness, "you don't want to create any issues that will call into question a particular decision. It's something that judges and senior people in government avoid."

Pitt has already lost the moral high ground in the No.1 issue on the SEC's agenda. His credibility is open to serious question on many other subjects vital to the markets. And if Pitt's baggage reduces public confidence in the SEC, it may be time to consider if the price of his expertise is too high.

Senior writer Weiss covers Wall Street.

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