Markkula Center of Applied Ethics

An Open Letter to SEC Chairman Harvey Pitt

By William K. Black

Dear Sir,

I was struck by the fact that your spokeswoman claimed credit for the small, brief market uptick after the PR exercise of having the CEOs sign letters saying that they were responsible for their financial statements. Since that time, the market has tanked. I trust that you agree that under your spokeswoman's "logic" you are responsible for that as well.

But seriously, things aren't going very well on your watch. Trillions of dollars of market capitalization have disappeared. Investors are displaying massive distrust of the stock market and the key participants that are supposed to make the markets work efficiently - the outside auditors, the stock analysts, the senior officers and directors of publicly traded firms and the Securities and Exchange Commission (SEC).

More precisely, investors don't trust you to represent their interests. You started in a hole because you've served for so many years as a shill for the worst elements of the accounting industry that blocked vital reforms that could have reduced the resultant financial scandals. But you keep digging a deeper hole for yourself.

You inherited a critically understaffed agency with crippling turnover rates. Fraudulent firms knew that they had only a remote risk of their filings be reviewed and that many SEC "investigations" (e.g., of George W. Bush) did not even involve questioning the senior officers and board members because the enforcement staff was stretched so thin. You took power in the aftermath of the bursting of a record bubble - circumstances that are associated with waves of fraud by controlling persons ("control fraud"). Unsurprisingly, that is exactly what happened. Any competent manager would have made two changes a top priority - getting permission to hire thousands of staff and authority to pay them a competitive wage (they are paid less than banking regulators). Instead, you kept quiet and cut staff!

The second way in which you dug a deeper hole for yourself was your consistent opposition to meaningful reform. Instead, you reacted to substantive criticism by falsely labeling it as partisan. Your "reforms" are transparent PR exercises.

Third, you are now reverting to your historic role as shill for the accounting industry. Your effort to kill the appointment of John H. Biggs, the supremely competent, vigorous reformer to the new accountancy board at the behest of the industry is dumb. It indicates that you just don't get it. Weak regulation of accounting is disastrous for investors and the markets and accountants. When rules are weak a variant of Gresham's law controls: "bad accounting drives good accounting out of the market." Biggs would be the greatest possible boon to reputable accountants.

And you are reverting to form with your thin-skinned response to constructive criticism. You decry a purported attempt "to pressure our agency to select … Mr. Biggs…. I do not intend to allow … this agency … to be coerced into selecting … any candidate … simply because a publicly orchestrated campaign has been undertaken." Really? What about the accounting industry's privately orchestrated campaign to block Biggs' appointment. Why didn't you decry it? Indeed, you succumbed to it. The effort you decry was mounted in response to the business as usual approach that produced the ongoing scandals. We want an end to your secret deals with the accounting profession and their political cronies.

Your resignation is greatly overdue. Nothing would be better for the capital markets than the "triple (de)witching" combination of your resignation, the appointment of a vigorous replacement and the appointment of Mr. Biggs. You can justly take credit for the upsurge in the market that will result from word of your resignation.

William K. Black is an Assistant Professor at the LBJ School of Public Affairs, the University of Texas at Austin and a Visiting Scholar at the Markkula Center for Applied Ethics. He is a criminologist, lawyer, and former S&L regulator.

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