By Mike McNamee
First, there was his client list, a rogue's gallery of companies and Wall Streeters who had run afoul of the nation's securities laws. Then there were his early pronouncements as chairman of the Securities & Exchange Commission, when he held out leniency for companies that turned in their own bad bookkeeping. Toss in his conservative ideology, and Harvey L. Pitt didn't look much like the tough cop on the beat that investors craved in the era of Enron Corp.
But look again. Pitt's SEC has just extracted a record $10 million fine from Xerox Corp. In this case and others, it's broadening its probe to target top officers and auditors. And even while it multiplies its accounting caseload, the SEC's Enforcement Div. keeps spinning out a long list of less-heralded policing actions against investment frauds and Internet scams. To tackle the workload, Pitt announced on April 17 that he squeezed out of a reluctant Bush Administration another $20 million to hire 100 new enforcers.
Vigorous enforcement may surprise critics. But it's a key part of Pitt's strategy: Regulate lightly, but carry a big stick. In keeping with his conservative philosophy, Pitt wants to ease the burden of detailed rules on the brokers, companies, and accountants he oversees. But the SEC chairman knows that deregulation exposes him to political attack and risks inviting abuses. The best counter: Strict, high-profile enforcement that makes splashy examples of big-name violators. When rules are less detailed, Pitt says, "we have an obligation to be tougher when people stray."
That's a classic Republican approach, but Pitt is going further. He's emphasizing "real-time enforcement," accelerating the SEC's ponderous pace to try to catch brokers and bookkeepers in the act. "Bringing a case six years after a company has gone down the tubes is not the most effective way to help investors," Pitt says. For the past six months, the Enforcement Div. has rung up an impressive tally of restraining orders, asset freezes, and the like to stop schemes in progress.
Another hallmark of Pitt's tenure: The agency is striking harder at higher-level corporate officers and auditors. The SEC has sued six former top officers of Waste Management Inc. to recover the pay that they earned by pumping up WMI's stock price with $1.7 billion in allegedly inflated profits. In a rare fine against a top accounting firm, the agency has already extracted $7 million from WMI's auditor, Arthur Andersen. Those precedents could be chilling for Xerox's officers and its auditor, KPMG.
Pitt's tough enforcement stance won't satisfy some critics, because it comes with a flip side--easier regulation. And the agency's aggressive actions could backfire, says one former SEC enforcement director. He warns the SEC could pay a price in more litigation and court reversals: "It's not as easy as they imply to assign accountability for these complex financial cases."
That's a concern, admits Stephen M. Cutler, the SEC's director of enforcement: "Our first job always is to get it right." But investors are looking for someone to fight back against cooked books, phony investments, and tainted analyst picks. Few are going to complain if the SEC chief shakes off his lapdog image and turns out to be a Pitt bull after all.
McNamee covers the SEC from Washington.