by John M. Curtis
(310) 204-8700

Copyright October 7, 2002
All Rights Reserved.

inding himself in the hot seat, Security and Exchange Commission Chairman Harvey L. Pitt proved he can take a whipping, meted out by the Senate Governmental Affairs Committee. Releasing a blistering report about SEC deficiencies, Sen. Joseph I. Lieberman (D-Conn.) called the SEC's oversight problems "systemic and catastrophic," failing to protect investors from egregious conflicts of interest in the securities industry. Lieberman highlighted the SEC's failure to provide adequate oversight for stock analysts, investment bankers and credit agencies, fueling corporate abuses and leading to mega bankruptcies like Enron, Global Crossing, WorldCom, etc. Though Pitt began his tenure in Aug. 2001, his unwillingness to accept any accountability bewildered members of congress. Throwing former Enron Chief Financial Officer Andrew S. Fastow in the slammer doesn't repay destitute investors or prevent future corporate scandals.

      While Lieberman points fingers at corrupt analysts, investment bankers and credit agencies, the SEC bears some responsibility for creating the permissive atmosphere, allowing scores of worthless companies to go public. Oversight agencies can't pass the buck to corporate carpetbaggers, unethical investment bankers, lax credit agencies or corrupt accounting firms. When Enron got into hot water, they blamed Arthur Andersen, who, working together with Andrew S. Fastow, concocted aggressive accounting schemes to hide debt in phony offshore partnerships. "The SEC with its relatively small staff, does not, and is not set up to, directly perform many of the tasks necessary to root out fraud," said the report, ignoring the agency's primary role of setting strict standards for companies going public. Getting bamboozled is one thing, but failing to provide oversight to brokerage houses whose investment bankers and stock analysts were in bed together was inexcusable.

      Lieberman's committee is trying to ascertain whether the SEC could have done more to prevent the devastating bankruptcies, costing shareholders their entire retirements and life savings. In Enron's case, the SEC failed to scrutinize Enron's financial filings that might have uncovered Fastow's shenanigans. Few officials have much sympathy for Enron but Republicans question the timing of the report one month before the November elections. "Working together with the Congress and other governmental representatives," Pitt promised to heed the committee's findings. "We are well underway toward taking and completing the tasks necessary to restore investor confidence," responding to the market's concerns that the fox is still supervising the henhouse. Turning the SEC into another Internal Revenue Service won't stop publicly traded companies from cooking the books. Auditing annual reports of America's 500 largest companies has symbolic value but doesn't root out of corporate fraud and malfeasance.

      Lieberman and his committee must not only address the SEC's need to audit existing corporations but also review the process by which private companies go public in the first place. Greenspan's "irrational exuberance" and dot-com stock bubble was created, in part, by the SEC allowing far too many unsound business to go public. Adding more auditors won't tighten the standards and slow the pace with which unscrupulous entrepreneurs take unprofitable companies public. All the SEC's due diligence didn't prevent the hoards of empty shells from selling stock and exposing investors to undue risk. Criticizing stock analysts for not changing "strong buy" ratings while companies were going belly-up won't return the life-savings of duped investors. Guaranteeing the independence of analysts is a step in the right direction. But Pitt must do much more to correct the "lackadaisical" approach identified in Lieberman's report.

      Rating services like Moody's and Standard & Poors can't hide behind the tidal wave of corporate fraud, leaving investors holding the bag. They must take the heat for giving inflated credit ratings on companies teetering on Chapter 11. "Like all participants, we were given misleading, inaccurate and fraudulent information by Enron," said an unnamed spokeswoman for Moody's, justifying the worthless bond ratings given to financially insolvent companies after hitting the headlines. Rating services shouldn't downgrade companies to "junk" only after reading the Wall Street Journal or listening to MSNBC. Pitt must scrutinize the due diligence used by credit agencies to assign ratings and warn investors about potential risks. When Enron's stock tanked—and its capital dried up—officials tried desperately to delay downgrading corporate paper, including asking a former Treasury Secretary and Wall Street kingpin Bob Rubin to intercede. Credit agencies should be free from corporate arm-twisting and political pressure.

      Finding the SEC culpable in the Enron mess, Lieberman's senate committee must now focus on the SEC's wider role in corporate malfeasance and the recent market bubble. During the go-go '90s, the SEC loosened the standards by which privately held business went public. Pushing too many unworthy IPOs through the pipeline created unrealistic expectations and sent stock prices soaring. When the bull market dominated the headlines—especially through the Internet and cable news broadcasts—average investors jumped into stock mutual funds in record numbers, driving equity prices through the roof. During that period of, as Greenspan puts it, "irrational exuberance," the SEC went to sleep, while corporate carpetbaggers looted corporations like their own piggy banks. With so many investors disillusioned, it's time for the SEC to wake up and get back to work. Pitt needs to stop pointing fingers and put his house in order.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's a consultant and expert in strategic communication. He's author of Dodging The Bullet and Operation Charisma.

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