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Securities and Exchange Commission Chairman Harvey Pitt and the new Public Company Accounting Oversight Board both took a punishing blow last week. The new board will likely endure. Pitt may not. Private securities lawyers close to the the SEC, former SEC officials, and sources within the agency speculate that the fracas surrounding the appointment of William Webster as chairman of the new oversight body may lead to Pitt’s ouster. Pitt, through a spokeswoman, insisted last week he will not resign. The White House continued to profess support for the embattled SEC chief. Pitt’s 14-month tenure as chairman has been plagued by complaints of the appearance of impropriety. Critics, including several congressional Democrats, have claimed that his work as a private lawyer on behalf of scandal-tarred accounting firms and his recent meetings with executives from companies under SEC investigation undermine public confidence in the agency. So far, Pitt has withstood those charges and retained the support of President George W. Bush. But SEC observers note that in the Webster appointment fiasco, Pitt stands accused of actual misconduct, not just political blundering or insensitivity to public perception. According to press accounts, which the SEC has not denied, Pitt failed to inform the other four SEC commissioners that Webster had chaired the audit committee of U.S. Technologies — a struggling D.C.-based company that has been sued for fraud by some shareholders. No one has said that Webster acted improperly while at the company. But private securities lawyers and others close to the SEC say that Pitt clearly should have informed the other commissioners of Webster’s role at U.S. Technologies, and of the results of an inquiry into the matter by Robert Herdman, the SEC’s chief accountant. “This is bad judgment, not just the appearance of bad judgment,” says one former SEC official. “It’s serious.” “One of the things that the SEC does is insist on disclosures,” says another D.C. lawyer with years of experience before the agency on major securities matters. Pitt “failed to disclose information that any reasonable person would consider material. You could say that he violated one of the fundamental tenets of the agency that he heads.” Webster was appointed to lead the new accounting oversight board at a fractious Oct. 25 meeting of the SEC commissioners. At that meeting, Pitt championed Webster, 78, a senior D.C. partner at Milbank, Tweed, Hadley & McCloy and former director of the CIA and FBI. But Democratic Commissioner Harvey Goldschmid questioned Webster’s familiarity with accounting issues and strenuously urged the appointment of pension fund executive John Biggs, a vocal critic of the accounting profession. Webster ultimately garnered the votes of the three Republican commissioners. The meeting exposed a rift between Pitt and Goldschmid, a Columbia University Law School professor and former SEC general counsel. Goldschmid implicitly condemned Pitt’s handling of the oversight board appointments, saying at the public meeting that “the selection process has been inept.” “To my knowledge,” Goldschmid added, “none of the individuals [up for consideration as board members] has been properly vetted.” Just days later, The New York Times reported that sometime before the commissioners’ Oct. 25 vote, Webster alerted Pitt and SEC chief accountant Herdman to U.S. Technologies’ troubles. Yet neither Pitt, Herdman, nor Webster informed any of the other commissioners. Christi Harlan, an SEC spokeswoman who indicated that she was speaking on behalf of Pitt, not the agency as a whole, said Herdman’s staff investigated the U.S. Technologies issue and determined “there was nothing there.” Harlan would not say whether, or when, Herdman’s staff communicated the results of the inquiry to Pitt or anyone else at the agency. On Oct. 31, the commissioners resolved to launch an internal investigation of Webster’s appointment. “All the commissioners wanted [the probe],” said Harlan. “The chairman made the call.” That inquiry is being handled by the SEC’s own inspector general, Walter Stachnik, who was appointed in 1989 by then-Chairman David Ruder. SEC commissioners have also directed the agency’s general counsel, Giovanni Prezioso, to lead an investigation of the allegations of fraud at U.S. Technologies, and Webster’s conduct while he served as the chair of the company’s audit committee, according to a source within the SEC. Pitt’s spokeswoman, Harlan, said she could neither confirm nor deny the existence of the investigation. Prezioso did not reply to requests for comment. Congress’ investigative arm, the General Accounting Office, has also been asked to examine the circumstances surrounding Webster’s selection and appointment. Sen. Paul Sarbanes (D-Md.) and Reps. Barney Frank (D-Mass.) and John Dingell (D-Mich.) sent a letter to the GAO last week requesting the inquiry. A GAO spokeswoman said on Nov. 1 it was still unclear who would handle the investigation. Likely candidates include Thomas McCool, who heads up the division within the agency that deals with SEC matters, or Robert Cramer, managing director of the special investigations team within the general counsel’s office. Neither could be reached for comment. Several SEC observers expressed dismay at the fissure that clearly divides the commissioners on the subject of the accounting oversight board. Sources within the agency say that staff morale is low and frustration with Pitt is becoming widespread. “The staff hates it,” says one former SEC official. “They’re mortified and disgusted.” Still, at open meetings last week, the commissioners managed to discuss new proposed rules — rules unrelated to the accounting industry — under the Sarbanes-Oxley Act. Despite some testy exchanges, all five appeared to be fully engaged in the task of fleshing out the law’s provisions. And several former SEC lawyers say they don’t expect the agency’s enforcement team to be side-tracked or undermined by the Webster upheaval. “Enforcement largely runs itself,” says one observer. Stephen Cutler, the head of the Enforcement Division, could not be reached for comment. But even lawyers who have defended Pitt in the past now say they’re skeptical of his ability to retain control of the agency. Some say they don’t expect him to remain chairman beyond next spring. President Bush could at any time nominate a new chairman. If that nominee were to make it through the Senate approval process, he or she would effectively displace Pitt, who would be demoted to commissioner. Few expect Pitt would choose to remain at the agency under that scenario, however. In a measure of the cloud that the Webster debacle has cast over Pitt’s future, SEC watchers were actively speculating last week about possible successors. But politically plausible candidates were not easy to come by. After all, few seasoned professionals in the securities arena can declare themselves free from any connection to the corporate and accounting scandals that dot the American economic landscape. And even the appearance of impropriety can undermine an SEC chairman.

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