Firing offense

(Washington, D.C.): Harvey Pitt‘s days as chairman of the Securities and Exchange Commission seem numbered. It now appears that, once the mid-term elections are behind him, President Bush will cut his losses on one of the most regrettable of his appointments and find new leadership for the rarely more important SEC.

A Bill of Particulars

Mr. Pitt has given his critics ample reason for demanding his resignation. Since his installation at the Commission last Fall, he has repeatedly displayed a tin-ear politically and insensitivity, to put it charitably, to the appearance of impropriety. This is all the more remarkable since Harvey Pitt spent a decade as an SEC staff attorney (including three years its general counsel) then, subsequent to his departure, nearly a quarter-century working with the SEC as part of a highly lucrative practice of securities law.

Yet, as SEC Chairman, Pitt has serially embarrassed the President, notably by: engaging in controversial dealings with former clients and Wall Street mavens under investigation; indulging in delusions of grandeur by a freelance — and preposterous — effort to secure for himself cabinet rank; and obstructing efforts to secure long-overdue reforms in the accounting industry. A President for whom loyalty is less of a personal credo than it is for George W. Bush would probably have shown the door to such a subordinate long ago.

Now, Chairman Pitt is under no fewer than three different investigations — not counting the congressional gauntlet he will have to run next week — in connection with yet another debacle. He decided to oppose the appointment of a prominent advocate for accounting reform to head up a newly created oversight panel, then failed to disclose to either the White House or his fellow commissioners that his preferred choice, former CIA Director William Webster, had been in charge of the audit committee of a corporation accused of fraud. This act of arrogance, if not malfeasance, will almost certainly prove to be the proverbial straw on an overloaded camel’s back.

AWOL in the War on Terror

There is, however, another, less well-known reason that argues for Harvey Pitt’s dismissal: He has been absent without leave (AWOL) in the war on terror. Specifically, he has studiously ignored the danger posed to our economy and security, and to individual investors’ portfolios, by companies trading in the U.S. capital markets who have corporate operations in terrorist-sponsoring states.

Mr. Pitt has, in effect, taken the position that the SEC need not require transparency about the “material risk” associated with investments in such entities unless the amount of corporate investment or exposure in rogue states could materially harm the often-huge multinational companies themselves. Using this test, the threshold may not be breached until the investments run into the many millions of dollars.

Unfortunately, this definition ignores the fact that even a relatively small amount of money in equipment, technology, financing or other investments provided to state-sponsors of terrorism by foreign companies — or overseas subsidiaries of U.S. companies — can produce potentially disastrous risks to the share value and reputation of these companies, to say nothing of the national security of the United States.

For example, in 1999, the German multinational Siemens sold Saddam Hussein many sets of lithotripters under the rubric of medical equipment Iraq has been permitted to purchase as part of the so- called “oil for food” program. It turns out that when the electrical switches in these devices, nominally acquired for use as kidney stone-smashers, are employed in sequence, they can be used to detonate nuclear weapons. While the modest proceeds of this sale would hardly be noticed in the bottom line of a huge company like Siemens, can there be any doubt that the value of Siemens’ shares could be materially, and adversely, affected if its switches wind up enabling Saddam’s most deadly weapons of mass destruction?

The Pitt standard contrasts unfavorably with one adopted in May 2001 by Laura Unger, who served on an interim basis as SEC chairman prior to the incumbent’s appointment. After considerable internal deliberation and soul-searching on the question of material risk, Ms. Unger and her staff concluded that investors have a need for “enhanced disclosure for foreign registrants doing business in sanctioned countries [pursuant to economic sanctions administered by the Treasury’s Office of Foreign Assets Control].” Ms. Unger called for SEC reviews of “registration statements filed by companies doing business with [such] countries,” increased transparency required of them about their dealing with rogue states and improved communications between the SEC and other U.S. government agencies concerning foreign registrants whose activities were subjected to such intensified scrutiny. Mr. Pitt has not seen fit to take any of these steps.

The Bottom Line

It will not be enough to relieve Harvey Pitt of his responsibilities. The President and the Senate must satisfy themselves that his successor will play an active role at the SEC safeguarding not only U.S. national interests, but those of millions of Americans who may now, unwittingly, be assuming material risks to their livelihoods and pensions by investing in companies doing business with our enemies in the war on terror.