Bush Sends Pitt to Prosecute His Former Clients
By Stephen Labaton New York Times 7/17/2002

WASHINGTON, July 17 -- Harvey L. Pitt, the embattled head of the Securities and Exchange Commission, said today that with the expiration of ethics restrictions that have bound him during his first year in office, he would play a direct role in enforcement cases involving companies and accounting firms that were once his law clients.

In an interview today, Mr. Pitt -- who had generally avoided questions about his intentions -- said that his background as a leading securities lawyer was an asset, not the liability cited by critics who say he should continue to recuse himself from matters involving former clients.

"This will inevitably sound self-serving, but the fact is it is an enormous advantage to the public to have somebody who knows about the securities business and the securities law as I do, and it would be unthinkable to deprive people of my expertise," he said in the interview.

The restrictions, under federal ethics rules and an agreement that Mr. Pitt made with the agency, expire in two weeks, though Mr. Pitt could have voluntarily continued to limit his role.

In recent months Mr. Pitt -- who as a Wall Street lawyer represented all of the top investment houses and exchanges, all of the largest accounting firms and the accounting industry's trade group -- has come under withering criticism just for maintaining contact with former clients. Some members of Congress have been calling for his resignation -- most prominently Senator John McCain, Republican of Arizona, who reiterated that view today.

"I think he is damned if he does and damned if he doesn't," Mr. McCain said in an interview. "If he doesn't recuse himself, there will be questions as to whether he should have or not, and whether he will be objective. If he does recuse himself, we have an S.E.C. without a chairman. That is why he should serve the country in another capacity."

In more than two dozen instances, including the investigation of Arthur Andersen for its role in the collapse of Enron, Mr. Pitt has recused himself. With two vacant seats on the five-member commission and two other commissioners serving without Senate confirmation, some of those decisions have presented problems for the agency.

One case involving accusations that Ernst & Young violated independence rules by maintaining a business relationship with a client has already been thrown out by a judge, because only one commissioner was able to vote on it. A large fraud case, involving senior executives at Waste Management, could encounter the same problem.

Two more nominees to the commission are to go before a Senate committee for confirmation on Thursday, and hearings for two others may be held next week. The confirmation of those nominees could take some of the political pressure off Mr. Pitt -- but the ethical decisions he faces in the months ahead have the potential to be politically dangerous.

Moreover, his decision to wade into cases involving former clients is certain to fuel further criticism by some that the administration and its appointees have been too cozy with the corporate and accounting interests at the heart of the current market crisis.

But Mr. Pitt said today that if he continued to recuse himself, he would be largely ineffective. Instead, he promised to pursue an aggressive approach in enforcement proceedings, saying that the markets and investors demand that the agency come down mercilessly on accounting firms and corporations that have misled investors.

"There is a reason for a one-year cooling-off period, a period that is used by other officials and federal judges all the time," said Mr. Pitt, who was a senior partner at the New York firm of Fried, Frank, Harris, Shriver & Jacobson before his appointment to the S.E.C. by President Bush. "At the end of that period, people should focus on the substance and not on my past."

Mr. Pitt has said it is unfair to criticize him because of clients, calling it "guilt by occupation." He emphasized that he remains beholden to none of his former clients, particularly since he has no intention of ever going back into private practice.

"I cannot carry my past with me forever," he said. "I have no intention of ever practicing law again. So all of the concern of me currying favor with my clients misperceives who I am."

Mr. Pitt said, too, that he had no intention of stepping aside. " As corny as it sounds, this is the only job I really wanted since I got steeped in securities law," he said. "To me this is the greatest job in the world. I don't even want to think about leaving."

Mr. Pitt and the other commissioners are not involved in the day-to-day handling of enforcement proceedings, which are left to career officials. But the commissioners do play crucial roles in authorizing investigations and in ultimately deciding whether the agency should bring or close a case.

Senator Jon S. Corzine, Democrat of New Jersey, said that Mr. Pitt ought to participate in cases involving his former clients as the rules permit, although "he needs to be extraordinarily sensitive" to possible ethics issues and appearances.

"If you believe he should continue as S.E.C. chairman, which I do, I think he ought to follow the rules," he said. Ethics rules bar Mr. Pitt from ever participating in any matter in which he had been substantially involved when he was in private practice.

But other politicians said that the current climate of distrust in the markets -- and the questions raised about Mr. Pitt's earlier meetings with former clients like Xerox and the KPMG accounting firm -- obliged him to go the extra mile and extend his recusal period.

"There is no confidence that he is an independent judge of the complaints which will come before the S.E.C. regarding the accounting industry," said Representative Edward J. Markey, Democrat of Massachusetts, who has also suggested that Mr. Pitt step down. "There is a crisis of confidence, and the S.E.C. needs a leader who has the confidence of the American investor."

Alan R. Bromberg, a securities law expert at the Southern Methodist University School of Law, said that Mr. Pitt should extend his recusal period for at least another year, saying that "he is still carrying the baggage of representation of many of the people who will likely be involved in future decisions of the S.E.C."

Politically, Professor Bromberg said, it will be impossible for Mr. Pitt to vote in favor of a former client, even if the facts and law support that decision, because he will be seen as taking a dive. "If he votes against taking any action, it's bound to be thrown out that he's protecting his clients again," he added.