A Closer Look at Who’s Watching Over Your Nest Eggs

Sightings from The Catbird Seat

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From Den of Thieves, by James B. Stewart:

Above the Law

The shock of the stock market crash and the Depression had set off a reform movement in Congress culminating in Senate hearings conducted by special counsel Ferdinand Pecora beginning in 1932. Though Pecora’s withering cross-examination of some of Wall Street’s leading investment bankers, the American public learned about insider trading, stock-price manipulation, and profiteering through so-called investment trusts.

Most of the abuses uncovered involved information bestowed on a favored few and withheld from the investing public. It was not only information that directly affected stock prices, such as the price of merger or takeover offers, but information that could more subtly be turned to a professional’s advantage: the true spread between prices bid and prices asked, for example, or the identities of buyers of large blocks of stock and the motives behind their purchases.

In the wake of widespread public revulsion and populist fury, Congress passed historic legislation, the Securities Act of 1933 and the Securities Exchange Act of 1934. A new federal agency, the Securities and Exchange Commission, was created to enforce their provisions. Congress deemed the enforcement of its new securities laws to be so important that it enacted corresponding criminal statutes.

By separating banking from securities underwriting, the raising of capital, and distribution of stocks, bonds, and other securities, the securities act set the stage for modern investment banking. . . .


Since the end of the 1980s, profound changes have already taken place on Wall Street. Suffering from extensive layoffs and a recession as well as the aftermath of this scandal, Wall Street has given every sign of being severely chastened.

Individuals may have survived the scandal, but their institutions have foundered, with Drexel in bankruptcy and a struggling Kidder, Peabody quietly put up for sale by General Electric. Solomon Brothers, caught in a Treasury-market scandal, was eventually fined $290 million, and it, too, had to struggle to survive.

New instances of major securities prosecutions were few, and the takeovers that spawned so much crime nearly vanished from the financial landscape. The perception, at least, was that insider trading and more devious forms of securities fraud had become far less prevalent.

Yet history offers little comfort. The famed English jurist Sir Edward Coke wrote as early as 1602 that “fraud and deceit abound in these days more than in former times.” Wall Street has shown itself peculiarly susceptible to the notion, refined by Michael Milken and Ivan Boesky and their allies, that reward need not be accompanied by risk.

Perhaps no one will ever again dominate the financial world like Milken with his junk bonds. But surely a pied piper will emerge in some other sector.

Over time, the financial markets have shown remarkable resilience and an ability to curb their own excesses. Yet they are surprisingly vulnerable to corruption from within. If nothing else, the scandals of the 1980s underscore the importance and wisdom of the securities laws and their vigorous enforcement.

The Wall Street criminals were consummate evaluators of risk – and the equation, as they saw it, suggested little likelihood of getting caught….

Fifty years passed between the scandals of the 1920s and their counterparts in the 1980s.

If Wall Street escapes another major threat to its integrity for even half as long, the crackdown that culminated in Milken’s conviction will have proven of historic value….

(Well . . . no such luck.)

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February 6, 2003

SEC nominee vows pursuit of corporate fraud

He adds top priority would be finding chief for accounting board

By March Gordon

WASHINGTON – President Bush’s nominee to head the Securities and Exchange Commission pledged aggressive enforcement of corporate anti-fraud rules yesterday and said that picking a new chairman for an accounting industry oversight board is his top priority.

At his Senate confirmation hearing, Wall Street investment banker William Donaldson defended his record as a former chairman of the New York Stock Exchange, but he softened his opposition to a rule that prohibits companies from disclosing information to financial insiders ahead of the public.

Donaldson, a Bush family friend, pledged to work to rebuild investor confidence shaken by last year’s business scandals and to allow the SEC to fully investigate and prosecute corporate lawbreakers without regard to politics.

Among those accounting failures, Bush’s own transactions as a onetime director of Harken Energy Corp drew renewed scrutiny, and the SEC has been investigating Vice President Dick Cheney’s tenure as head of oil-service company Halliburton Co.

As for the accounting board chief, Donaldson told the Senate Banking, Housing and Urban Affairs Committee that the selection was “the number one priority that I have. … We’re behind the eight ball.”

The current SEC chairman, Harvey Pitt, announced in November that he was resigning in a flap over his selection of former FBI Director William Webster to head the board. Webster also resigned.

Donaldson, 71, received a friendly reception from senators and is expected to be confirmed soon by the full Senate.

Sen. Richard Shelby, R-Ala., the committee chairman, told Donaldson: “You will be undertaking a tremendous public trust…. Your leadership will be key to rebuilding the faith of investors in our markets.”

Donaldson did not promise instant results.

“Just as the war on terrorism cannot be won overnight, neither can investor confidence be completely restored so quickly,” he said.

“Corporate America, Wall Street and their professional stewards – lawyers, accouontants, corporate and financial managers and financial regulators – still have much work to do.”

Senators were closely impatient to replace Pitt, whose continued lame-duck tenure has become a political irritant as a beleaguered SEC makes new rules for companies and pursues corporate fraud and accounting cases.

“It’s now the first week in February and he’s still on the job,” said Sen. Paul Sarbanes of Maryland, the committee’s senior Democrat. “We need to get moving.”

If confirmed, Donaldson said, “I will demand accountability from all responsible parties. I will aggressively enforce civil penalties and work cooperatively with state and federal law-enforcement agencies … to bring those who break the law to justice.”

In 2001, Donaldson denounced as “terrible” a year-old SEC rule prohibiting companies from revealing financial results and other information to stock analysts and other Wall Street insiders ahead of the public – a long-standing practice. Like other critics, he contended it could make executives afraid to say anything.

Asked about the issue at the hearing, Donaldson acknowledged his earlier stance but said he believed the rule was now “working better.”

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December 12, 2002

Donaldson is defendant in suit over stock fraud

Bloomberg News

NEW YORK – William Donaldson, the man nominated by President George W. Bush to head the Securities and Exchange Commission, is a defendant in a stock fraud lawsuit that says he hid accounting misstatements as chairman of Aetna Inc., the biggest health insurer in the United States.

Filed by investors last year in the U.S. District Court in Manhattan, the suit charges that Aetna and Donaldson deceived investors by reporting that the company had adequate reserves to cover medical claims. Aetna, Donaldson and Donaldson’s successor, John Rowe, have asked a judge to dismiss the case.

Class-action lawyers often name corporate officers and directors when they sue companies in such fraud claims. The questions raised by this case may not be enough to derail Donaldson’s nomination, legal specialists said.

Michael Perino, a Columbia University law professor, said he doubted the case would survive.

“Reserves are a judgment call on the part of the company, and there are a lot factors that go into the proper amount of reserves,” he said. The suit should not scuttle Donaldson’s nomination, he added.

“The mere fact of the filing of such lawsuits, to my mind, is not enough to tarnish anybody,” said Larry Hamermesh, a corporate law professor at Widener University.

“Is this the kiss of death for him? The answer has to be no. Is it a concern? Sure.”

At Aetna, based in Hartford, Connecticut, a spokesman said the company “believes the suit has no merit.”

Salvator Graziano of Milberg Weiss Bershad Hynes Lerach LLP, who is representing the investors, declined to comment. His firm runs the biggest class-action law practice in the United States.

The lawsuit alleges that Donaldson was aware the company had “material problems” establishing adequate reserves to cover medical claims and that Aetna hid the problems from regulators.

The suit says that from September 2000 to April 2001, Donaldson and Aetna hid these problems from the market in regulatory filings and news releases and that only in April 2001 “did the company belatedly disclose that its 2000 medical expense reserves were understated by at least $90 million,” causing shares to fall 20 percent. . . .

Continued at William H. Donaldson

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October 26, 2002


In a vote on party lines, former FBI and CIA head William Webster was named yesterday by a bitterly split Securities and Exchange Commission to head a new board of to oversee the scandal-plagued accounting industry.

The 3-2 vote for Webster at a public meeting came after rancorous discussion among the five SEC commissioners.

Commissioner Roel Campos, who along with Democrat Harvey Goldschmid had supported pension fund executive John Biggs for the job, said the selection of Webster feed the perception that the SEC has been influenced by the accounting industry.

SEC Chairman Harvey Pitt, clearly feeling under attack, made an emotional defense of his choice of Webster.

“I am beholding to no one,” Pitt insisted.

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And, just who is William Webster? . . . (and why are they saying those terrible things about him?)

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October 4, 2002

Lawmakers query SEC’s Pitt on Goldman meeting

WASHINGTON, (Reuters) – Two lawmakers wrote to U.S. Securities and Exchange Commission Chairman Harvey Pitt on Friday, questioning a meeting he reportedly held last week with the chairman of an investment bank under SEC investigation.

Rep. Ed Markey and Rep. John Dingell, both Democrats, wrote to Pitt regarding a meeting that The Washington Post reported he held last Friday with Henry Paulson, chairman of Goldman Sachs Group (GS), without notifying SEC enforcement staff. . . .

Sources close to the commission said Pitt did meet last Friday with officials from Goldman to discuss ways the commission and Wall Street might come to terms over probes of analyst and initial public offering allocation practices.

Markey and Dingell said they wrote to Pitt “to express their alarm about Mr. Pitt’s decision to, once again, hold private meetings with the heads of firms that are the target of inquiries while excluding the enforcement staff.”

The lawmakers wrote, “Six months ago, following a similar episode involving KPMG Inc., Chairman Pitt assured Reps. Markey and Dingell that he would no longer hold such meetings.”

“I am very anxious to hear Chairman Pitt’s explanation of this latest tryst in direct contradiction of his own stated policy against such meetings,” said Markey.

“The absence of enforcement staff in these meetings undermines the credibility of the commission and damages the morale of commission staff.” . . .

The SEC said in late April it had launched a formal investigation into whether Wall Street misled investors by issuing biased, overly bullish research reports to bring in lucrative investment banking business.

In the same month, Pitt held a meeting with the head of accounting firm KPMG, a former client of Pitt’s when he was a private lawyer, while it was under SEC investigation.

© 2002 Reuters

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October 30, 2002


By The Catbird

The Global Capital Markets Center today sponsored a seminar at Duke University regarding Corporate Accounting Reform.

Guest speaker Harvey Pitt, SEC Chairman, was introduced by Duke University President, Nannerl Keohane.

The Global Capital Markets Center (GCMC) is a Joint Venture of Duke University School of Law and The Fuqua School of Business.

Their website lists as GCMC’s corporate sponsors: FSA; The Bond Market Associates; PricewaterhouseCoopers; Merrill Lynch; Banc of America Securities; Standard & Poors; Goldman Sachs; NYSE Foundation, Inc.; and Wachovia Securities.

In addition to being the head of Duke University, Nannerl Keohane is also a director of IBM and a member of the Trilateral Commission and the Council on Foreign Relations.

Mr. Pitt told his captivated audience that the SEC was working on reforms to restore investors’ confidence in the stock market….

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November 5, 2002

SEC Chairman Pitt Resigns

Embattled Chairman Resigns, Faced Criticism Throughout Tenure

The Associated Press

W A S H I N G T O N — Securities and Exchange Commission Chairman Harvey Pitt resigned under fire tonight.

“The chairman tendered his resignation to the president,” Christi Harlan, SEC spokeswoman said.

Three administration officials, speaking on condition of anonymity, said the White House welcomed the resignation of a regulator who had created a host of political problems for President Bush in the runup to tonight’s elections.

The latest came when Pitt failed to share with fellow commissioners information about William Webster, the newly named chairman of an accounting industry oversight board, before the agency voted last week to put the former CIA and FBI director in charge of the panel.

The revelation led SEC commissioners, including Pitt, to request an internal investigation Thursday of Webster’s selection — and renewed the almost daily drumbeat of calls from Democrats and other Pitt critics for his resignation.

Political Thorn for Bush

Pitt, who first worked at the SEC in the late 1960s and built his career as an attorney in appearance-conscious Washington, has been criticized for meeting with the heads of companies under SEC investigation and for his close ties to the accounting industry — at a time when the SEC is investigating major accounting fraud at big corporations. Pitt represented the Big Five accounting firms while in private practice.

In this latest instance, Pitt withheld information about Webster’s lead role on the auditing committee for U.S. Technologies, a company facing investor lawsuits alleging fraud. Webster told The New York Times that Pitt assured him that SEC staff had looked into the issue and it would not pose a problem.

Last month, Democrats asked Bush to remove Pitt, whom they accused of bowing to the accounting industry by opposing the appointment of John H. Biggs to head the oversight board.

Supporters of Biggs, a pension fund administrator, believed he would advocate tough regulation of the accounting industry….

Copyright 2002 The Associated Press. All rights reserved.

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November 12, 2002

Webster Resigns From Oversight Panel

The Associated Press

Former FBI Director William Webster resigned Tuesday as head of a special accounting oversight board, saying he wanted to avert “new distractions” as the congressionally created agency seeks to rebuild public confidence after a series of business scandals.

The move capped nearly two weeks of speculation regarding Webster’s future in a debacle that already has brought the resignations of Bush appointee Harvey Pitt, chairman of the Securities and Exchange Commission, and the SEC’s head accountant.

Webster declined Tuesday to blame Pitt for not informing fellow SEC commissioners that Webster had headed the audit committee of a company now under investigation for fraud. But he acknowledged that the information should have been shared. Pitt, a Bush appointee, resigned a week ago over that. . . .

Pitt, whose 15-month tenure has been marked by a series of political missteps, has remained in office pending President Bush’s naming a replacement to be confirmed by the Senate.

Bush last week voiced confidence in Webster’s integrity, although the president also said he wanted to see the outcome of an investigation of the circumstances surrounding Webster’s selection. . . .

Pitt is facing investigations into whether he concealed from other SEC members Webster’s role for a company that is under investigation. The SEC voted 3-2, along party lines, to appoint him on Oct. 25. Pitt and the other two Republicans approved Webster and the two Democrats opposed his appointment.

In a statement accepting the resignation, Pitt made no mention of the controversy surrounding Webster’s appointment. “I continue to believe that investors would have benefited from Judge Webster’s dedication to the best interest of the American people,” he said.

News of Webster’s resignation came a day before the oversight board was scheduled to have its first meeting. His letter to Pitt was dated Monday and released Tuesday afternoon. . . .

The turmoil comes at a time when the government is trying to bolster the confidence of investors and consumers shaken by corporate scandals over the past year and the SEC is investigating questionable accounting at dozens of big companies.

Webster’s appointment was pushed by Pitt and endorsed by the Bush White House. Democrats preferred John Biggs, head of the largest teachers’ pension fund, whom they believed would be tough on the accounting industry.

Creation of the oversight board was mandated by Congress last summer in legislation responding to the wave of accounting scandals at Enron, WorldCom and other big companies. The five-member board, to be independent of the accounting industry, will be armed with subpoena authority and disciplinary powers and financed by fees from publicly traded companies.

The SEC inspector general and Congress’ auditing arm, the General Accounting Office, are investigating the circumstances surrounding Webster’s appointment and the Senate Banking Committee plans hearings.

Webster has said he told Pitt that he headed the audit committee at U.S. Technologies, which is considered insolvent and has been sued by shareholders alleging fraud. The office of the chief accountant, Robert Herdman, then told Pitt that information did not create a problem for Webster’s selection.

Webster fired U.S. Technologies’ outside auditors last year when he headed the board of directors’ auditing committee.

The auditing firm, BDO Seidman, recently alleged that Webster had made “false and misleading statements” about how much he knew about the company’s financial problems.

BDO Seidman also released documents showing that in a July 13, 2001, conference call with the audit committee, its accountants warned the committee members of “material weaknesses in internal accounting control.”

Webster said last week that the auditors did voice concerns, but not in an urgent, “house on fire” way. He continued to insist that BDO Seidman was fired because the audit committee believed it was charging too much and taking too long to do its audits —- not because of a warning about the company’s financial controls.

Pitt announced Tuesday that the SEC commissioners had unanimously chosen Jackson Day, the agency’s deputy chief accountant, as acting chief accountant until a permanent replacement is named….

< < < FLASHBACK < < <

February 1999


The Metropolitan Corporate Counsel Magazine

By Robert M. Romano*

The six-year administration of Arthur Levitt Jr. as Chairman of the Securities and Exchange Commission has been marked by several important enforcement initiatives. In past years, for example, we have witnessed the so-called “Rogue Broker” initiative directed at large securities firms and the “Pay-for-play” initiative directed at participants in the municipal bond market. More recently, we have seen the SEC pay special attention to abuses by investment advisers (including personal trading and “soft dollar” arrangements).

Today, the spotlight has fallen on two accounting issues which affect both public companies and their outside auditors. In a series of recent speeches by senior SEC officials and in several pending SEC enforcement cases, the agency has taken aim at the practice of “earnings management” by public companies — i.e., pushing the envelope on GAAP to meet Wall Street earnings expectations — and has issued a clear warning to the accounting profession on the subject of independence….

Chairman Levitt has recently said that the Commission’s goal in pursuing this initiative is to effect a “fundamental change on the part of corporate management as well as the whole financial community” and to that end has solicited the cooperation and assistance of both the accounting profession and the financial reporting community to address these perceived abuses….

A recent amendment to Rule of Practice 102(e) gives the SEC a powerful new weapon against accountants allegedly acting improperly and all indications are that the Commission intends to use it aggressively to address these issues.


In a speech last September, Chairman Levitt said he believes that the practice of earnings management is on the rise and is threatening the integrity of financial reporting. Calling such practices a “game of nods and winks,” the Chairman expressed concern that “the motivation to meet Wall Street earnings expectations may be overriding common sense business practices.”

He explained five of the more common “accounting gimmicks,” described below, that the Commission contends are being used with increasing frequency and then called upon the accounting profession and financial reporting community to work with the Commission to restore integrity, transparency and comparability to the periodic reports of public companies.

1. “Big Bath” Charges

So called “big bath” charges are those a company takes in connection with a restructuring. Increasingly, according to Chairman Levitt, companies have been overestimating these charges hoping that investors will overlook the one-time loss and focus instead on future earnings. The result of inflating these charges is that the overage can later be reclassified as income, especially at a time when earnings would otherwise fall short of Street expectations.

2. Creative Acquisition Accounting

Creative acquisition accounting, also call “merger magic” by Chairman Levitt, occurs when a company classifies a larger than appropriate portion of an acquisition price as “in-process” research and development. Like big bath charges, research and development expenses can be taken as a one-time charge, removing a drag on future earnings.

3. Cookie Jar Reserves

A third accounting technique under assault by the SEC is the establishment of “cookie jar reserves.” These reserves are created when a company uses unrealistic assumptions to overestimate future liabilities. The excess capital is put into a reserve fund and often used in periods of future earnings shortfalls to boost the company’s numbers. This issue appears to be at the heart of the Commission’s recent enforcement action involving W. R. Grace & Co., described below.

4. Materiality

In financial reporting, some items are legitimately considered so insignificant that they are not worth measuring with exact precision. Chairman Levitt contends, however, that companies are increasingly making intentional errors in their financial reports to help them achieve analysts’ expectations, and later arguing that the mistake’s effect on the company’s bottom line was immaterial.

5. Premature Revenue Recognition

This is a practice whereby a company aims to boost its current earnings by manipulating the recognition of revenue. This entails, for example, considering a contemplated sale of goods complete, and therefore recognizing revenue, before the product is shipped.

Chairman Levitt believes that “almost everyone in the financial community shares responsibility for fostering a climate in which earnings management is on the rise and the quality of financial reporting is on the decline.” In turn he envisions that any response, to be effective, must also involve the entire community.

In what he termed a cooperative public-private sector effort, Chairman Levitt has presented an action plan that calls for the Commission to amend its rules to require additional disclosure regarding accounting assumptions and for the accounting community to clarify its rules relating to the five above-described practices. The plan also calls for improving the oversight of outside auditors and audit committees.

Simultaneously, the Chairman stated, the Commission’s enforcement program will “formally target reviews of public companies that announce restructuring liability reserves, major write-offs or other practices that appear to manage earnings” and “continue to root out and aggressively act on the abuses of the financial reporting process.”

True to the Chairman’s word, on December 22, 1998, the Commission sued W.R. Grace & Co., in federal district court in Florida, and seven individuals in an administrative proceeding, for alleged financial fraud, including manipulation of Grace’s reported quarterly and annual earnings.

Specifically, the suit alleges that between 1991 and 1995, Grace, through members of senior management of Grace and a subsidiary, deferred reporting income by increasing or establishing reserves not in conformity with GAAP, and thereafter used the reserves to manipulate its reported earnings.

The suit further alleges that Grace filed false and misleading reports with the SEC that incorporated the effects of its deferred income and failed to disclose to the investing public that it was manipulating earnings.


On a related, but distinct topic, Chairman Levitt has expressed concern that the current environment is challenging the independence of outside auditors. In one recent speech, he stated his belief that auditors, wishing to retain their corporate clients, are under pressure to overlook, or at least not to stand in the way of, a company’s earnings management.

In addition, he has highlighted, and appears troubled by, the recent trend by accounting firms to perform non-audit services, such as consulting, for their audit clients and the effect this might have on an auditor’s mandate to be independent. In light of the above, the SEC is scrutinizing the role of outside auditors and audit committees more than ever before.

Recent History

In late 1997, the SEC initiated an administrative proceeding against KPMG Peat Marwick LLP alleging that the firm failed to comply with established standards of auditor independence and therefore had engaged in “improper professional conduct” within the meaning of Rule 102(e) of the Commission’s Rules of Practice. Specifically, the complaint alleged that KPMG made a large loan to the president of one of its audit clients and capitalized a separate business owned by the same individual.

While the KPMG case was progressing (it has gone to trial but has not yet been decided), another SEC disciplinary proceeding involving accountants was decided and caused the promulgation of an amendment to Rule 102(e) to define “improper professional conduct.”

In October 1998, a divided Commission promulgated Rule 102(e)(1)(iv), which provides that, in addition to intentional or reckless acts, the standard “improper professional conduct” can be satisfied by certain ill-defined acts of negligence, specifically:

>> a single instance of highly unreasonable conduct that results in a violation of applicable professional standards in circumstances in which an accountant knows, or should know, that heightened scrutiny is warranted; or

>> repeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards, that indicate a lack of competence to practice before the SEC.

The passage of this amendment has sparked a fair amount of controversy. Some commentators question whether the SEC has the authority to bring negligence actions against accountants and others have concluded that, regardless of whether they have the power, the SEC is attempting to regulate the accounting profession in a way that should be reserved for state licensing authorities and professional organizations.

Current Agenda

Chairman Levitt recently described auditors as “the public’s watchdog in the financial reporting process, “saying that “[w]e rely on [them] to put something like the good housekeeping seal of approval on the information investors receive.”

Then, referring to recent disclosures of accounting irregularities, such as those at well-known companies like Sunbeam, Waste Management and Cendant, he said he could not “help but wonder if the staff in the trenches of the profession have the training and supervision they need to ensure that audits are being done right.”…

Chairman Levitt has proposed that the Public Oversight Board — the accounting profession’s independent self-regulatory watchdog — form a group to review the way audits are currently performed and assess the impact of the recent trend towards earnings management on the public interest. He also asked the financial reporting community to take a hard look at the role of audit committees. He made it clear, however, that if the industry failed to respond in a way that protected investors interests, the SEC would take appropriate action….


The Commission’s announced focus on earnings management and the role auditors play in that process should be taken very seriously. It is imperative that counsel work closely with management to ensure accuracy and appropriateness when a company intends to, for example, establish a reserve or take a restructuring charge — and be prepared to defend such decisions if reviewed by the SEC….

The passage of Rule 102(e)(1)(iv), complete with its negligence standard, gives the SEC a powerful new weapon to be used in its disciplinary efforts against auditors and company accountants, and with well-known companies making headlines in 1998 for perceived accounting improprieties in connection with their financial reporting, we should presume that the SEC will continue to press its enforcement agenda with more cases like those against W. R. Grace and KPMG….

*Robert M. Romano is a partner in the New York office of Morgan, Lewis & Bockius LLP. A former SEC and Justice Department counsel, Mr. Romano specializes in the defense of companies and individuals in SEC enforcement investigations. Katherine Allen Kessler, an associate at Morgan, Lewis & Bockius LLP, assisted in the preparation of this article.

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July 11, 2001

SEC’s Walker Leaves Enforcement Post

Washington — Securities and Exchange Commission Director of Enforcement Richard Walker announced Tuesday that he’s leaving the agency after a decade of service, once a new chairman is confirmed.

During Walker’s three-year stint as the agency’s top cop he cracked down on accounting fraud in corporate America, often singling out the Big Five firms for financial reporting shenanigans.

In his most recent action, he fined Andersen $7 million for filing “false and misleading audits” of Waste Management Inc., the largest fine ever levied against an accounting firm.

Walker also spearheaded investigations into several other high-profile financial fraud cases involving Cendant, Microstrategy, Sunbeam and the 1999 auditor independence case against PricewaterhouseCoopers.

“It’s been a privilege to spend 10 years at this great agency,” Walker said in a statement announcing his departure. “I am extremely proud to have had a hand in the commission’s work and to have contributed to its mission of protecting investors.”

Walker has not yet accepted a position in the private sector, and has said he will remain at the SEC to assist with the transition to a new chairman, expected to be Washington lawyer Harvey Pitt….

(Catbird Suggestion: Please write a tell-all book, Mr. Walker. It should be a #1 bestseller! )

Electronic Accountant Newswire staff

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SEC nominee Harvey Pitt says would divest holdings

By John Poirier

WASHINGTON, July 19, 2001 (Reuters) – Securities lawyer Harvey Pitt, tapped by the Bush administration to become Wall Street’s top regulator, on Thursday told U.S. lawmakers he plans to shed himself of all financial holdings.

The 56-year-old Washington lawyer told the U.S. Senate Banking Committee, which conducted a confirmation hearing on his nomination, of his plans to divest himself from the companies he would regulate to remove any perceived conflicts of interest.

According to a copy of financial disclosure forms provided by the U.S. Office of Government Ethics, the value of his financial holdings — some of which are held jointly with his wife, Saree Ruffin Pitt — range from $1.5 million to about $2.5 million.

U.S. rules require presidential appointees to file such documents….

If confirmed by the full Senate, Pitt would become the top watchdog of publicly-traded companies. . . .

A quick confirmation by the Senate is expected.


In addition to financial holdings, the forms show the numerous clients during his more than 20 years of work at Washington law firm, Fried, Frank, Harris, Shriver & Jacobson.

Clients range from companies in the banking and financial services industries to technology and Big 5 accounting firms as well as foreign firms and trade associations.

Specific companies include Dell Computer Corp., Morgan Stanley Dean Witter, Bear Stearns Cos. Inc., Anheuser-Busch, audit committee, Reliance Group Holdings Inc., Bank One Corp, Bank of America Corp. and American Honda Motor Co. Inc. the forms show.

Foreign clients include Lloyds of London, luxury goods giant LVMH and Bank of Montreal.

Legal services were also provided to the Securities Investor Protection Corporation, Investment Company Institute, American Institute of Certified Public Accountants, and the Securities Industry Association, a Wall Street trade group.

The New York Stock Exchange was also a client.

Individuals include Stephen Case, chairman of media titan AOL Time Warner Inc., and Michael Saylor, chairman and chief executive of MicroStrategy Inc.

The disclosure documents, which are dated May 24, show that Pitt held stocks jointly with his wife in companies such as Johnson & Johnson, insurer Chubb Corp. and Wachovia Corp.

Stocks held by his wife include Agilent Technologies Inc., Alcoa Inc., American Home Products Corp., Baxter International Inc., Coca-Cola, Exxon Mobil Corp., General Electric Co., Philip Morris Cos. Inc., among others.

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Senate Confirms SEC Chairman Harvey Pitt

WASHINGTON, Aug. 3, 2001 (SmartPros) —- The Senate unanimously approved Harvey Pitt as SEC chairman for a term expiring June 5, 2007. President Bush is expected to appoint Pitt as chairman now that the confirmation process is complete.

Pitt was nominated in early July by President Bush to head the SEC and was confirmed by the Senate Committee on Banking, Housing and Urban Affairs in late July. The final confirmation occurred on August 1 by the U.S. Senate.

Pitt has spent two decades as a lawyer and corporate partner resident in international law firm Fried Frank’s Washington, DC and New York offices.

He has represented clients in every facet of securities-related issues, including the AICPA and Big Five firms. . . .

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September 26, 2001

Companies’ purchases of own stock helped market,
SEC chairman testifies


WASHINGTON, (AP) – A surge of company stock buybacks helped bolster a shaken market, and the Securities and Exchange Commission may continue to allow unrestricted purchases, SEC Chairman Harvey Pitt said Wednesday.

In testimony to the House Financial Services Committee, Pitt said the SEC also is considering loosening regulations to allow the airline and insurance industries to raise capital more quickly.

“We are exploring all possibilities,” he testified.

Delta on Wednesday became the last of the nation’s six major airlines to announce mass job cuts due to repercussions from the Sept. 11 terrorist attacks. Overall, U.S. airlines plan to trim more than 93,000 jobs and Boeing Co. up to 30,000 by the end of next year.

Insurance companies, meanwhile, could end up paying an estimated $30 billion to $40 billion for the attacks, the biggest insured loss ever.

Chief executives of several big insurance companies later told the committee that legislation being drafted to shift some of the insurance burden to the government (a.k.a. US taxpayers) was sorely needed.

The measure being drafted by the Bush administration and lawmakers from both parties would make the government the “insurer of last resort” for businesses that suffer future terrorist attacks.

Before the market reopened on Sept. 17 after a four-day shutdown, the SEC used its emergency powers for the first time to ease restrictions on companies’ purchases of their shares.

Pitt provided no specifics about effects of the easing but noted “a decided upsurge” of such corporate stock purchases. Those in turn “had a very positive effect on people’s attitude toward the market,” Pitt said.

The SEC may continue the relaxed rules further, Pitt said….

Pitt, a native New Yorker who was a prominent securities lawyer before being confirmed as SEC chairman last month, said many of his close friends were killed in the collapsed buildings and the planes that hijackers smashed into them.

The SEC’s “No. 1 priority,” he told the lawmakers, is to pursue its investigation of whether terrorists tried to use advance knowledge of the attacks to profit from stock and options trading.

If such trading occurred, “We will do everything within our power to track those people down and bring them to justice,” Pitt declared.

The SEC on Wednesday asked all securities businesses to check their records for accounts held or transactions by any of the 21 suspects in the case identified by the FBI, or by any of the 27 people and organizations with suspected links to terrorism – including Islamic militant Osama bin Laden – named in President Bush’s order Monday to freeze assets.

Securities businesses include brokerage firms, investment banks, investment advisers, bond dealers and mutual funds.

Large and small banks around the country already have found accounts held by several of the 21 individuals on the FBI list, the bureau has told banking regulators.

In the days before the terrorist assaults, unusually high numbers of put options were purchased for stocks of AMR Corp. and UAL Corp., parent companies of American Airlines and United Airlines. Each carrier had two planes hijacked. A put option is a contract that gives a holder the right to sell an asset at a specified price before a certain date.

Pitt acknowledged it can be difficult to trace such transactions to the individuals who originated them.

In many cases involving insider trading in stocks, for example, individuals committing the fraud are able to obscure their identities by using offshore accounts, straw traders and other ruses.

© 2001 Star-Telegram, Fort Worth, Texas

$ $ $

October 3, 2001

Bank of America among 38 stocks in SEC’s attack probe

WASHINGTON – (Bloomberg News) The U.S. Securities and Exchange Commission is investigating whether shares of Bank of America Corp., American Express Co., Lockheed Martin Corp. and 35 other companies were the subject of insider trading before the terrorist attacks on New York and Washington….

The SEC, the Federal Bureau of Investigation, U.S. Treasury agents and authorities in Europe and Asia are combing brokerage, market and banking records for bigger-than-normal trading or money transfers that might expose who was responsible for assaults that killed thousands of people….

“We are still carrying on investigations into trading around Sept. 11,” said Karin Loudon, a spokeswoman for the Financial Services Authority, the U.K. markets regulator. “We haven’t discovered anything yet.”

Charlotte Judet, a spokeswoman for Paris-based Commission des Operations de Bourse, said French investigators continue to review unusual trading in some stocks before the Sept. 11 assault. She declined to be more specific.

Option Volume Surges

A Bank of America option that would profit if the No. 3 U.S. bank’s stock fell below $60 a share had more than 5,900 contracts traded on the Thursday and Friday before the Sept. 11 assaults, almost five times the previous average trading, according to Bloomberg data. The bank’s shares fell 11.5 percent to $51 in the first week after trading resumed on Sept. 17.

While investigators have focused on short selling and trading in put options, some defense contractors on the SEC’s list, including Raytheon Co., had higher volume in options that profit from rising stocks.

A Raytheon option that makes money if shares are more than $25 each had 232 options contracts traded on the day before the attacks, almost six times the total number of trades that had occurred before that day.

A contract represents options on 100 shares. Raytheon shares soared almost 37 percent to $34.04 during the first week of post-attack U.S. trading.

No Evidence Yet

Officials at the SEC and in Europe repeatedly have said they hadn’t yet turned up solid evidence of terrorist trading, and the trading surges may simply be coincidental. SEC Chairman Harvey Pitt and Treasury Secretary Paul O’Neill have said they continue to take the investigation seriously.

The SEC’s list of companies, which was reported earlier today by Associated Press, was concentrated in airline, brokerage, insurance, banking and defense stocks.

Delta Airlines Inc., Northwest Airlines Corp. and Southwest Airlines Co. were among seven airlines listed, joining AMR Corp. and UAL Corp., already known to be a focus of the probe. Trading of bearish options in AMR Corp. and UAL Corp. surged in the days before terrorists hijacked and crashed two American Airlines and two United Airlines jets.

Trading in Boeing Co., Lockheed Martin, and Raytheon is being examined, the notice said.

Market activity in Cigna Corp., MetLife Inc., American International Group Inc. and other insurers also is being reviewed.

Brokerage Options Reviewed

Lehman Brothers Holdings Inc. and American Express joined brokerage and financial services companies on the list. It already has been reported that securities of Morgan Stanley Dean Witter & Co., Bear Stearns Cos. and Citigroup Inc. were being scrutinized.

Morgan Stanley was the World Trade Center’s biggest tenant, and Citigroup has estimated that its Travelers insurance unit may pay $500 million in claims from the terrorist assaults.

Market makers handling trading in AMR and UAL options have said they noticed suspicious or peculiar trading in those securities in the days before the terrorist attacks.

Trading in some AMR and UAL put options surged to as much as 285 times the previous average volume during the days before terrorists flew hijacked United and American jets into the World Trade Center’s twin towers and the Pentagon.

# # #

Now, for a closer look at some of the
sitting on YOUR nest eggs.


Harvey Pitt – Chairman of the Securities and Exchange Commission.

From Web Today:

July, 2001

Harvey Pitt Bad Choice for SEC Chairmanship

by Rev. Louis Sheldon, Chairman: Traditional Values Coalition

The Securities and Exchange Commission should be headed by a person who has both the professional skills and the moral clarity to make tough decisions about financial matters. The chairmanship of the SEC should be held by someone who has a moral compass, not a person who is willing to represent the interests of a pornography empire.

Last week, TVC sent a letter of concern to President Bush over his choice of Harvey Pitt to be our nation’s Securities and Exchange Commission chairman. We expressed our concern about Pitt after learning that in 1999 he had done legal work for the New Frontier Media company. Pitt had helped New Frontier overcome a problem with the NASDAQ over two stock sales. According to news reports, Pitt’s aid to this pornography company helped it keep its listing on the NASDAQ.

New Frontier Media is a purveyor of sexually explicit filth that is piped into homes through its three cable services: Pleasure, TeN, and Extasy.

Three of New Frontier’s biggest pornography customers are AT&T, Time Warner, and Echo-Star Communications (DISH-TV).

This company also operates, an Internet company that hosts such sites as “Teen Sex,” “Café Flesh,” and two other sites with names describing oral sex and women’s sex organs.

The Vice President of Corporate Development at New Frontiers is Greg Dumas, who has the dubious distinction of having been Vice President of Marketing for Larry Flynt Publications. Dumas helped launch Hustler Online.

Hustler, of course, is one of the most obscene magazines in print and Flynt’s smut empire demeans and humiliates women by portraying them as body parts to be used and thrown away.

Flynt has also promoted pedophilia through his “Chester the Molester” cartoon. Pedophiles in the North American Man-Boy Love Association (NAMBLA) must gain inspiration from Hustler’s pro-child molester messages.

Is Harvey Pitt really proud that he represented such an evil and perverse company?

Harry Gracin, New Frontier’s securities lawyer says he is offended by TVC’s efforts against Harvey Pitt. According to Gracin, Pitt “. . . is an honest and decent man, and he took the case to help us out. All he agreed to was to get us a fair hearing.”

Gracin must have a different definition of what constitutes an “honest and decent man,” than we do. Pitt aided a company that earns millions by selling the sexual exploitation of women and teenage girls for profit. And a company where one of its vice presidents proudly lists his association with Larry Flynt as a positive professional accomplishment.

Pitt’s nomination reminds me of the recent choices of former Massachusetts Governor Paul Cellucci to be our Canadian Ambassador and homosexual activist Scott Evertz to be White House AIDS czar. These were unfortunate choices, but it is not too late for the White House to change course on the choice of Pitt.

We urge the White House to look elsewhere for our nation’s next SEC chairman.

Traditional Values Coalition is an inter-denominational public policy organization comprising over 43,000 member churches. For more information call Christy Moore at (202) 547-8570. TVC, 139 C Street, SE, Washington, DC 20003. Web address:

* * *

July 18, 2001

SEC Nominee Pitt Earned $3 Million Last Year

WashingtonHarvey Pitt, President Bush’s nominee to head the Securities and Exchange Commission, reportedly amassed more than $3 million last year as a lawyer.

The Associated Press reported that Pitt, 56, would take away his capital account at the firm, worth between $500,000 and $1 million, and an unspecified partnership share when he is confirmed as SEC head.

The disclosure report shows that Pitt earned a partnership income of $3,055,578 last year.

Among Pitt’s legal clients were the American Institute of CPAs, Arthur Andersen, Deloitte & Touche, Ernst & Young, KPMG Peat Marwick and PricewaterhouseCoopers.

(For more on these upstanding clients, GO TO > > > P-s-s-t, wanna buy a good audit?)

The Senate Banking Committee made the report, which must be filed by presidential nominees, available before Pitt’s confirmation hearing on July 19. The White House announced in May Bush’s intention to nominate Pitt as SEC chairman, but the nomination wasn’t formally sent to the Senate until last week.

Pitt was the SEC’s general counsel from 1975 to 1978, before going into private practice at his law firm, Fried, Frank, Harris, Shriver & Jacobson.

Electronic Accountant Newswire staff

< < < FLASHBACK < < <

From Den of Thieves, by Pulitizer Prize winner James B. Stewart:

The Bank Leu Case

When Robert Romano (an SEC compliance officer investigating insider trading) called, Gary Lynch had been head of enforcement at the SEC for just four months – four difficult months. Morale had been badly damaged when Lynch’s predecessor, John Fedders, resigned in early 1985 after The Wall Street Journal revealed that he had physically abused his wife.

To quell the scandal, SEC chairman John Shad had moved quickly to replace him. Lynch, the division’s associate director, a 35-year-old lawyer who’d spent almost his entire career with the SEC, was the somewhat surprising choice. … But the staff was relieved that Lynch, one of their own, was chosen rather than some Reagan favorite, someone who might be too committed to deregulation to enforce the laws. . . .

As the merger boom unfolded, Lynch was appalled by the persistent run-ups in stock prices on takeover rumors. Obviously, confidential information was leaking into the market on an unprecedented scale, to the detriment of investors who waited for public announcements. Average investors were becoming alienated and distrustful.

Soon after Lynch assumed his new position, in April 1985, Business Week ran a cover story with the headline, THE EPIDEMIC OF INSIDER TRADING: THE SEC IS FIGHTING A LOSING BATTLE TO HALT STOCK-MARKET ABUSES.

The article only underscored Lynch’s own concerns. He vowed to step up insider-trading enforcement, to increase the staff assigned to it, and to follow up every lead vigorously.

Public confidence in the markets, he felt, was at stake….

When he received a copy of the mysterious Caracas letter, he didn’t think that much of it. It seemed to be a routine complaint about brokers. Brokers weren’t “insiders” in the conventional sense, and someone was always complaining to the SEC about their broker.

But the Bank Leu angle held some promise. Bank Leu had figured in two other recent SEC inquiries including the Textron case, neither of which had gone anywhere. So Lynch turned the letter over to John Sture, his associate director and a dogged investigator and litigator, who put together a team. Among the lawyers assigned was Leo Wang, the same lawyer who had taken Dennis Levin’s deposition in Textron.

What was most intriguing about the case was the large number of stocks involved: about 27 in the case of Bank Leu, about 16 in Campbell’s account. Most insider-trading cases, even the sensational Thayer case, involved only a few stocks, often only one. The illegal trading is done by a company insider or immediate tippee with knowledge of only that company’s transactions. Yet the staff knew that such isolated cases couldn’t account for what seemed to be an epidemic of insider trading on Wall Street….

Lynch, Sture, and their colleagues concluded there were enough leads worth pursuing, and the SEC commissioners gave their routine approval to begin an investigation. On July 2, 1985, the SEC investigation, identified only by its case number, HO-1743, formally commenced. Armed with the agency’s subpoena power, the lawyers set about looking for evidence.

Wang subpoenaed Brian Campbell and obtained his trading and phone records….

Wang could tell from Campbell’s phone records that the young stockbroker was in almost daily contact with a Bank Leu official named Bernhard Meier. The constant contact wasn’t surprising, the bank was far and away Campbell’s largest client. He had taken the Bank Leu business with him when he moved to Smith Barney from Merrill Lynch.

“Did it ever occur to you at any time that Mr. Meier had access to inside information?” Wang asked.

“No, I had no knowledge of that, no,” Campbell replied, adding that he never even had any “suspicion” or “indication” of inside information.

Wang asked Campbell about the times he bought stocks just before takeover bids. Campbell insisted (while acknowledging that the trades mirrored Bank Leu trading) that he had bought the stocks after doing his own research into the companies, not because of any inside information….

Then Wang asked Campbell about a curious $10,000 check deposit that showed up in his bank records. The check had been drawn upon Meier’s Morgan Guaranty Trust Co. account in New York. That, Campbell testified, was a “loan” from Meier for a real estate venture….

Then Wang asked Campbell about another client account that appeared to trade in the same stocks as Campbell and Bank Leu: BCM Capital Management….

That, he admitted, was a company formed by a friend, a lawyer named Kevin Barry. Campbell himself had tipped Barry to the Bank Leu stocks.

Campbell continued to insist, however, that he had no inkling inside information might be involved….

Wang’s instincts told him that Campbell was lying. Reviewing the testimony, Lynch agreed….

Pursuing Campbell and Barry, however, wouldn’t lead the lawyers further “upstream” in what they now suspected was a fairly significant insider-trading scheme, given the number of stocks. Their goal had to be the original source of the intelligence, and for that, they were going to have to assault the formidable obstacle of Bank Leu, shrouded in centuries of Swiss secrecy traditions.

The SEC lawyers decided to start simply, with a friendly, low-key phone call to Meier at his office in Nassau.

The phone call caught Meier by surprise, even though he know the SEC was interested in the stocks Bank Leu had traded through Campbell, who had told him everything. At that point, Meier had talked to Dennis Levine, since Levine was the customer who’d initiated the trading. … Levine had not been concerned. He had called the inquiry routine and said it would go nowhere….

Meier was consumed with anxiety. He realized not that, despite Levine’s instructions, he had steered too many trades through Campbell. He had also traded the same stocks in his own account, as had Campbell, and BCM had traded in the same patterns. …. No wonder the SEC was suspicious….

On his way to Bank Leu, Levin stopped off in Key Biscayne, Florida, to visit Wilkis, who had rented a house there….

After Meier first told Levine of the SEC’s interest in the Campbell trading, Levine told Wilkis, he’d turned to Boesky for advice. Boesky had recommended a lawyer named Harvey Pitt.

“He’s gotten me through hundreds of these,” Boesky had told Levine.

“So you’re retaining Pitt?” Wilkis asked, feeling queasy.

“No, don’t be crazy,” Levine retorted. “I’m getting the bank to retain him. We’ll shut this down fast. I don’t have anything to fight.”

Wilkis wasn’t reassured. He worried Pitt would place the bank’s interests ahead of his friend’s. How did Levine know he could manipulate Pitt?

“You might have the right lawyer,” Wilkis told Levine. “I don’t know about the client.”…

Levine arrived in Nassau on Labor Day weekend 1985. Poised and confident, he quickly took charge of the situation, belittling the SEC, calling them incompetent. “You don’t have anything to worry about,” he assured the two bankers – as long as they did what he told them.

Quickly, Levine briefed them on his cover-up plan. He told Meir to take responsibility for initiating the trades. “If you go to the SEC and tell them that you traded in these stocks on behalf of your managed portfolio,” Levine explained … “The SEC can’t prove the opposite.”…

The essential thing was to prevent any suspicion that a Bank Leu client was the actual source of the trading recommendations. Meier, as a bank official, would never be legally considered an insider.

Levine also recommended that the bankers hire a good lawyer to deflect the SEC. He suggested Pitt, a former SEC general counsel now in private practice with Fried, Frank, Harris, Shriver & Jacobson’s Washington office.

By the time Levine left, Meier and Pletscher felt greatly relieved. They briefed the Bahamas branch general manager, Jean-Pierre Fraysse, on the plan to deceive the SEC.

“This seems to be the way to go,” Fraysse agreed….

~ ~ ~

Harvey Pitt settled his bulging waistline into a banquette of the Polo Lounge in the Westbury Hotel in New York.

The bearded, slightly disheveled, 40-year-old lawyer was a contrast with the tall, thin, impeccably groomed Fraysse, who was staying at the hotel and had flown to New York to meet Pitt in person.

“Why did you call me?” Pitt asked Fraysse.

“Your reputation has spread,” Fraysse said. “We’ve heard of you.”…

“Ah, the Swiss,” Pitt thought to himself….

Fraysee outlined the history of the bank’s contacts with the SEC, and the men talked generally about SEC investigations. Fraysee seemed relaxed, then mentioned that because he was returning to Switzerland, Pitt would soon be dealing with Meier directly….

Pitt met Meier for the first time on September 18 at Fried, Frank’s offices in lower Manhattan. The well-dressed Meier was calm, and seemed charming, worldly, and confident. His wife was a engaging and beautiful woman younger and taller that he was.

Tutored by Levine, Meier spoke at length about his stock-picking prowess, and his success at managing trading accounts for Bank Leu’s customers. He insisted he’d bought the stocks in question on the “fundamentals” …

~ ~ ~

That same day, Peter Sonnenthal, one of the SEC lawyers assigned to the case, entered the cavernous art deco lobby of New York’s Waldorf-Astoria Hotel….

“Could I have the room number of Bernhard Meier,” Sonnenthal asked politely.

“We don’t provide that information,” the clerk replied.

“But I’m a government agent,” Sonnenthal said.

The clerk still refused, so Sonnenthal grabbed a piece of paper and pen and hastily wrote out a makeshift subpoena demanding that the Waldorf-Astoria disclose Meier’s room number. The startled clerk took the paper to a superior, and the hotel complied immediately….

Sonnenthal rode up the elevator, walked swiftly to Meier’s room, and knocked. Meier, having arrived at the room only a short time before, opened the door unsuspectingly. Sonnenthal handed the startled banker an official U.S. government envelope containing two subpoenas: one calling for the bank’s records, and another, ominously, calling for all of Meier’s own personal trading records.

Meier was stunned, as much as by the fact that the SEC had found him in New York as by the subpoenas themselves….

At about 5:30 p.m., a frantic Meier called Pitt. His urbane facade was in shreds. Pitt, too, was now alarmed. These weren’t the ordinary tactics of the SEC.

The agency was playing hardball….

~ ~ ~

After the frantic call from Meier, Pitt wasted no time. Four days later he was on a flight to the Bahamas with a Fried, Frank colleague, Michael Rauch….

Pitt and Rauch met with Meier, Pletscher, and Richard Coulson, an American expatriate and former lawyer at Cravath, Swaine & Moore who was advising the bank. Meier seemed to be in charge, although Coulson often spoke for the bank….

“Bernie did the trading, and that’s all there is to it,” he said. “We’ll take our explanation to the SEC, and that should be the end of this,” he insisted….

The bank officials had no intention of changing their story – but they were worried. The publicity of an SEC enforcement action could be devastating to the bank’s effort to build a business base in the U.S.

Bank Leu wanted good relations with the SEC.

At the same time, the bank was adamant in its refusal to reveal the identity of its clients or trading in individual client accounts.

It was barred by Bahamas banking law from doing so, and such disclosures would violate the bank’s long tradition of secrecy….

~ ~ ~

On December 17, Pitt and Rauch arrived at Lynch’s office….

“What’s on your mind?” Lynch casually began.

Pitt opened a binder and began to speak from prepared notes. He began by briefly reviewing the status of his negotiations on behalf of Bank Leu. Then he dropped his bombshell.

“I can’t stand by my factual representations to you,” he said.

Fischer practically exploded. “What? Then we’ve wasted a lot of time. You made specific representations. . . “

Pitt let Fischer go on, then unveiled, as delicately as he could, what he had in mind. Speaking hypothetically, Pitt suggested that the SEC lawyers “assume” that the trading in the suspect stocks had be initiated not by Meier, as he had previously represented, but by a single client of the bank, someone he identified as a “status player” on Wall Street….

If that were the case, he asked, would the SEC consider such an agreement even if it emerged that some of the bank’s officers had piggybacked the customer’s trades, and may have destroyed evidence at the client’s behest? If so, Pitt said the bank would seek the permission of Bahamian authorities to disclose the customer’s identity. Rauch added that any such agreement would have to be contingent on the Justice Department similarly agreeing not to prosecute the bank or its officers under any criminal statutes.

Lynch asked Pitt and his colleagues to step outside the office while he conferred with his SEC colleagues….

After less than a half hour, the Fried, Frank lawyers were invited back to the table. Lynch said that he thought a satisfactory agreement could be worked out. He explained that he had some problems including Meier in any immunity agreement, but Pitt was adamant about protecting all the bank’s officers, and Lynch relented….

As the lawyers put their papers back into their briefcases, Wang and Fischer couldn’t resist pressing Pitt to identify the bank’s customer. They were beside themselves with curiosity. But Pitt wasn’t about to play his trump card so soon.

“Don’t worry, you’re going to get a big fish,” he assured them.

Suddenly Sture spoke up.

“For what you’re asking, he damn well better be a whale – Moby Dick.”…

~ ~ ~

The pieces were now all in place. On Friday, May 9, 1986, Pitt picked up the phone and called Lynch, who got on the phone immediately. Pitt didn’t waste time with any preliminaries.

“Moby Dick,” he said, “is Dennis B. Levine.”…


Ilan Reich and Robert Wilkis reported to the federal penitentiary at Danbury, Connecticut, on the same day, March 27, 1987.

They had met for the first time only after the collapse of the Levine ring, and the shared experience might have launched a friendship. But they reacted differently to prison. Reich became progressively more listless and withdrawn. Wilkis was outgoing and threw himself into an exercise program.

The two men were released after serving eight months of their year-and-a-day sentences. They haven’t met since. Reich began work as a consultant for a New York real estate developer. Wilkis found a new career in the entertainment industry, helping to put together a deal to finance Radio City Music Hall’s “Easter Spectacular,” starring the Rockettes….

Dennis Levine complained that he was ostracized as a “squealer” at Lewisburg, a federal prison in central Pennsylvania. He worked on the landscaping crew.

He completed his sentence in a Manhattan halfway house and was released on September 8, 1988….

* * *

December 01, 2001

Calling Off the Dogs

Recent signals from the SEC raise the question: Is Harvey Pitt taking a softer line on financial fraud?

Alix Nyberg, CFO Magazine

As accounting frauds go, the problems at Seaboard Corp.’s Chestnut Hill Farms division amounted to garden-variety book-cooking.

Division controller Gisela de Leon-Meredith had been caught overstating deferred-farming-cost assets and understating farming expenses, inflating revenues by a total of $7 million between 1995 and the first quarter of 2000. When confronted by the internal audit staff, Meredith fessed up, and parent Seaboard, a Shawnee Mission, Kansas-based agribusiness, announced that it would restate its earnings last August. Even investors, who held Seaboard’s stock price steady, were apparently nonchalant about the fraud.

The case became extraordinary, however, when the Securities and Exchange Commission thrust it into the spotlight this past October —- not as a warning to other companies, but as an example of good behavior on the part of Seaboard, which willingly handed over all of the evidence it had gathered from its internal investigation.

“When businesses seek out, self-report, and rectify illegal conduct, and otherwise cooperate with commission staff, large expenditures of government and shareholder resources can be avoided,” read the SEC’s official statement, or so-called 21(a) report, signed by recently installed chairman Harvey Pitt and commissioners Laura Unger and Isaac Hunt.

In Seaboard’s case, that meant a cease-and-desist order for its Chestnut Hill Farms division was the end of the matter. No charges or penalties were levied against the company or its senior management; Meredith walked away without even a fine. Extrapolating from the case, the report set forth “some of the criteria [the SEC] will consider in determining whether, and how much, to credit self-policing, self- reporting, remediation and cooperation” in reducing the severity of enforcement actions.

What’s this? Is Harvey Pitt calling off the guard dogs that his predecessor, Arthur Levitt, so carefully bred? . . .

“In [Pitt’s] speeches he says, ‘I’m going to be really tough’ —- then he turns around and says, ‘but I’m not going to punish you,’ ” says Lynn Turner, the SEC’s chief accountant until this past August and now professor of accounting at Colorado State University College of Business.

“I don’t know how you walk that fine line, but we’ll have to sit back and watch.” . . .

Levitt’s Hard Line

In theory at least, all this seems a radical shift from the heyday of Arthur Levitt, who took a consistently hard line on accounting shenanigans.

“Accounting cases were always a significant part of the agency’s inventory,” notes McLucas, but “the enforcement division has been quite aggressive” in the past few years.

Indeed, in the three years that followed Levitt’s famous “numbers game” speech in September 1998 —- from October 1, 1998, to September 30, 2001 —- the division brought lawsuits against at least 90 companies and 54 CFOs for financial-statement fraud, including such high-profile targets as Sunbeam, McKesson HBOC, and Cendant.

Meanwhile, major corporations such as Lucent, Raytheon, and Xerox are among the 250 or so cases still under SEC scrutiny, with probes widening within each firm….

Since many of the larger companies are multinationals, there was also a more intense focus on improprieties at foreign entities. The ongoing investigation of Xerox, for example, began with accounting problems found in its Mexico operations. Boston Scientific settled with the SEC last year on charges of channel-stuffing in its Japanese division. And several large companies, including IBM, American BankNote, and Chiquita, were hit with large fines for bribing outside parties in other countries….

The past several years have also given rise to a growing number of CFOs being held accountable for accounting trouble. About 60 percent of the cases in the last three fiscal years named a CFO as a defendant, up from an average of 43 percent for cases brought between 1987 and 1997.

And as CFO reported in September 2000 (“Jailhouse Shock”), more of those CFOs are facing criminal charges. Thanks to joint efforts between the SEC and states’ attorneys general, 19 CFOs went to jail or were awaiting sentencing between 1998 and 2000, more than six times the number who did time in the previous four years. . . .

The Future of Enforcement

What could really change with a new chairman? There are still many unknowns, including who President Bush will name to fill the four open commissioner slots. . . .

A renewed vigilance also seems present among external auditors, which themselves were subject to some unusual enforcement actions recently. In the past year, the SEC has taken action against Big Five auditors in at least three cases and named Andersen specifically for allegedly being complicit in fraud at Waste Management.

In fact, the SEC’s actions against Andersen resulted in a sizable civil settlement —- $7 million —- and marked the first time in more than 20 years that the agency had brought such action against a major accounting firm.

Only 10 of the 300 SEC financial fraud cases between 1987 and 1997 named auditors at big national firms, and none of them sought action against the firm itself, according to the COSO Report. . . .

Andersen, now facing public criticism for its work at Enron as well, has stepped up its efforts to “place fraud consideration at the heart of every audit, rather than make it a side issue,” says Toby J.F. Bishop, the firm’s partner in charge of fraud research and development. In this position, created about two years ago, Bishop is spearheading efforts toward more “professional skepticism.” . . .

Whether or not the SEC itself can more effectively combat accounting fraud, though, will be one of the more tantalizing questions of the next year. Pitt’s new strategy seems entirely in character for someone who, as a prominent attorney in the private sector, represented such clients as Ivan Boesky, major brokerages, and the Big Five accounting firms.

But before that, there was the Harvey Pitt who was the aggressive SEC general counsel.

“The question I’ve always had is: Which Harvey are we dealing with?” says Turner.

“Until we see some big cases, I have no idea.”

– Alix Nyberg is a staff writer at CFO.

William H. Donaldson – Bush’s nominee for Harvey Pitt’s replacement as U. S. Treasury Secretary.

Fat Cat CEOs

by Paul Bass, New Haven Advocate

Connecticut’s highest-paid executives.

John F. Welch Jr., General Electric

Total 2000 Compensation Plus Stock Option Grants: $231.2 million
How Many Workers Equal Welch’s Compensation?: 21,578 minimum-wage workers, 9,064 average workers, 1,155 U.S. presidents.

Sanford I. Weill, Citigroup

Total 2000 Compensation Plus Stock Option Grants: $330.3 million
How Many Workers Equal Weill’s Compensation?: 30,835 minimum-wage workers; 12,952 average workers; 1,651 U.S. presidents.

William H. Donaldson, Aetna

Total 2000 Compensation Plus Stock Option Grants: $35.7 million
How Many Workers Equal Donaldson’s Compensation?: 3,336 minimum-wage workers; 1,401 average workers; 178 U.S. presidents.

George David, United Technologies

Total 2000 Compensation Plus Stock Option Grants: $23.5 million
How Many Workers Equal David’s Compensation?: 2,194 minimum-wage workers; 921 average workers;
117 U.S. presidents.

H. Edward Hanway, CIGNA

Total 2000 Compensation Plus Stock Option Grants: $23 million
How Many Workers Equal Hanway’s Compensation?: 2,149 minimum-wage workers, 903 average workers,
115 U.S. presidents

– Paul Bass can be reached at

* * *

December 12, 2002

Donaldson is defendant in suit over stock fraud

Bloomberg News

NEW YORK – William Donaldson, the man nominated by President George W. Bush to head the Securities and Exchange Commission, is a defendant in a stock fraud lawsuit that says he hid accounting misstatements as chairman of Aetna Inc., the biggest health insurer in the United States.

Filed by investors last year in the U.S. District Court in Manhattan, the suit charges that Aetna and Donaldson deceived investors by reporting that the company had adequate reserves to cover medical claims. Aetna, Donaldson and Donaldson’s successor, John Rowe, have asked a judge to dismiss the case.

Class-action lawyers often name corporate officers and directors when they sue companies in such fraud claims. The questions raised by this case may not be enough to derail Donaldson’s nomination, legal specialists said.

Michael Perino, a Columbia University law professor, said he doubted the case would survive.

“Reserves are a judgment call on the part of the company, and there are a lot factors that go into the proper amount of reserves,” he said. The suit should not scuttle Donaldson’s nomination, he added.

“The mere fact of the filing of such lawsuits, to my mind, is not enough to tarnish anybody,” said Larry Hamermesh, a corporate law professor at Widener University.

“Is this the kiss of death for him? The answer has to be no. Is it a concern? Sure.”

At Aetna, based in Hartford, Connecticut, a spokesman said the company “believes the suit has no merit.”

Salvator Graziano of Milberg Weiss Bershad Hynes Lerach LLP, who is representing the investors, declined to comment. His firm runs the biggest class-action law practice in the United States.

The lawsuit alleges that Donaldson was aware the company had “material problems” establishing adequate reserves to cover medical claims and that Aetna hid the problems from regulators.

The suit says that from September 2000 to April 2001, Donaldson and Aetna hid these problems from the market in regulatory filings and news releases and that only in April 2001 “did the company belatedly disclose that its 2000 medical expense reserves were understated by at least $90 million,” causing shares to fall 20 percent.

Michael Carroll, who is representing Aetna, Donaldson and Rowe, in court papers called the suit “wrong-headed” and “irresponsible,” urging Judge George Daniels to throw it out.

* * *

July 1, 2002

HMOs Face Racketeering Lawsuits

CBS Evening News

If you have ever been angry at your HMO then attorney Dick Scruggs has news.

CBS News Correspondent Wyatt Andrews reports a federal court in Miami has ruled that Scruggs can sue six of America’s largest HMOs – Aetna, UnitedHealthcare, Prudential, Cigna, Healthnet, Humanaon the charge they operate a racket.

It’s the civil version of the same racketeering charge, called RICO, usually aimed at the mob.

“Its absolutely huge,” said Scruggs. “There aren’t many cases like this one.”

Even for Scruggs, that’s an understatement.

Scruggs, the same lawyer that helped battle Big Tobacco, has teamed with some of the highest priced trial lawyers in the country —- like David Boies, the lawyer who took on Microsoft. They are on a mission, they say, to reform managed care.

These lawyers could make tens of millions of dollars from this lawsuit but they say it’s not about money, it’s about making the HMO’s come clean.

“Right now HMOs have been telling subscribers they will get care based on medical need, and that’s not true,” Boies said.

So how are HMO’s a racket?

“I don’t know how else you would define it,” Scruggs said. “When they reap millions in premiums and don’t deliver benefits, it’s just garden variety fraud.”

That “doesn’t make them the mob, but in many ways its just as bad as the mob,” he said. “The mob doesn’t pretend to be legitimate.”

Managed care’s response to the racketeering charge is vehement.

“These cases are not sensible law, they are based on sand,” said Stephanie Kanwit, counsel for the American Association of Health Plans. “Nobody likes to be called Tony Soprano.”

The core of the racketeering charge is that managed care promises medically necessary care, but then conspires to deny care based on cost….

William Webster – Former head of the FBI and CIA. First head of the SEC’s new board designed to clean-up and oversee the secretive accounting industry, and protect your nest eggs.

From The Outlaw Bank: The Wild Ride Into the Secret Heart of BCCI, by Jonathan Beaty & S.C. Gwynne:

The Kerry subcommittee’s relations with the CIA were nearly as bad as they had been with Justice, and for the same reasons: Both agencies had known for years about BCCI and were hard-pressed to explain why nothing had been done.

After Kerry badgered the agency for several months for a briefing on its relationship with BCCI, the CIA finally agreed to a meeting. The problem was that the person sent to speak with Kerry staff members Jonathan Winer and David McKean was a junior officer.

“The guy they sent to brief us was a joke,” said Winer. “He didn’t even know who Kamal Adham was. He didn’t know anything about BCCI. He didn’t even seem to know why we were there.”

Winer said that after the meeting he and McKean had encountered another CIA briefer, who, noting their expressions, said, “You look like you guys just got screwed.”

Winer’s response: “No, you guys just screwed yourselves.”

Meanwhile, Kerry continued to press CIA Director William Webster for CIA reports on BCCI.

Finally, on July 23 came the first break. Webster admitted in a letter to Kerry the existence of two documents, both of which he described as “extremely sensitive.”

When Kerry reviewed them privately, he was astonished to find that one of them, dated 1986, reported that BCCI secretly owned First American…. He obtained permission to declassify it and showed it to Virgil Mattingly at the Fed, who, according to Kerry staffers, “expressed shock that the CIA, Treasury, State Department, and Office of the Comptroller of the Currency had possessed the information in 1986 and never provided it to the Federal Reserve.”

The CIA itself finally went public when Acting Director Richard Kerr announced at the National Press Club on August 2, before an uncritical audience of high-school students who were not allowed to ask questions, that the CIA did have some normal operational accounts with BCCI.

Winer’s comment that the CIA had “screwed” themselves was not far from the truth . . .

John Kerry is nothing if not persistent, and he was most dangerous to his adversaries on the BCCI case . . .

About the time George Bush nominated Robert Gates for director of the CIA. That nomination had been thrown into question in July when Alan Fliers, former head of the CIA’s Latin American task force, had pleaded guilty to two counts of lying to Congress about when high-level officials at the CIA first learned about the illegal diversion of funds to the Nicaraguan rebel forces. This raised new questions about what Gates himself, who had been deputy director under William Casey, knew about the Iran-Contra affair.

With the nomination of Gates – whose confirmation the Republication administration passionately wanted – under fire, Kerry saw his opportunity. He told the CIA that unless he got cooperation, the Gates nomination would be put on hold permanently….

Okay, replied the CIA, we’ll give you another briefing, a better one. No, said Kerry. He would be satisfied with nothing less that the public testimony of Richard Kerr.

And so Kerr, greatly against his will, was brought before Kerry’s subcommittee in October 1991, where he admitted both that the CIA had known for years about BCCI and that it had maintained accounts there….

* * *

November 13, 2002

Ex-FBI Director Resigns from Accounting Board

By Marcy Gordon, Associated Press

WASHINGTON – Former FBI Director William Webster resigned yesterday as chairman of a special accounting oversight board, saying he wanted to avert “new distractions” as the congressionally created agency seeks to rebuild public confidence after a series of business scandals.

The move capped weeks of speculation regarding Webster’s future in a debacle that already has brought the resignations of Bush appointee Harvey Pitt, chairman of the Securities and Exchange Commission, and the SEC’s head accountant….

Webster, who also once headed the CIA, announced his resignation in a letter to Pitt, who remains in office pending the naming of a replacement. Pitt quit earlier after a flap over his apparent failure to inform fellow SEC commissioners that Webster had headed the audit committee of a company being investigated for fraud.

President Bush last week voiced confidence in Webster’s integrity, although Bush also said he wanted to see the outcome of an investigation of the circumstances surrounding Webster’s selection….

Pitt is facing investigations into whether he concealed from other SEC members Webster’s role for a company that is under investigation….

Creation of the oversight board was mandated by Congress last summer in legislation responding to the wave of accounting scandals at Enron, WorldCom and other big companies. The five-member board, to be independent of the accounting industry, will have subpoena authority and disciplinary powers. It is financed by fees from publicly traded companies.

The SEC inspector general and Congress’ auditing arm, the General Accounting Office, are investigating the circumstances surrounding Webster’s appointment, and the Senate Banking Committee plans hearings.

Pitt announced yesterday that the SEC commissioners had unanimously chosen Jackson Day, the agency’s chief accountant, as acting chief accountant until a permanent replacement is named….

Latest information from the horse’s mouth:

* * *

For more on William Webster, GO TO > > > The Devil and William Webster

For more on the CIA and FBI connections, GO TO > > > The Secret Nests

For more on the Pacific Islands connections, GO TO > > > Broken Trust

For more on the Nukeing of Birds and Natives, GO TO > > > The Nuclear Nests

# # #

For more spots on the SEC, GO TO > > >

Aloha, Harken Energy


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Last Update March 2, 2003, by The Catbird