A Chairman Who Was 'Never Enthusiastic About

WASHINGTON (HedgeWorld)--Although Harvey Pitt's brief tenure at the Securities and Exchange Commission saw the launch of an investigation of hedge funds, people familiar with the matter do not believe that he was the driving force in that investigation.

Joe Nesler, an attorney with the firm of Gardner, Carton, & Douglas, Chicago, said Thursday that the inquiry was more Paul Roye's idea that Harvey Pitt's.

"Roye was more a pro-regulatory person, Pitt was never enthusiastic about regulation," said Mr. Nesler, who has many hedge fund clients, some of whom have received questionnaires from the SEC in the course of the investigation. Although it's possible that Mr. Pitt's departure might strengthen the hand of pro-regulatory figures in the industry such as Mr. Roye, Mr. Nesler hopes the impetus to scapegoat hedge funds for financial woes has already reached high tide and begun to ebb, regardless of who the next chairman is.

"When things first break," such as the Enron crash and its aftermath, "there is always a headlong rush to regulation. But, when people then sit down to look at things carefully, they often realize that the problems are not as great as they seemed at first or perhaps stem from different areas," he said. The would-be regulators of hedge funds are entering that latter phase now.

Tough Cop/Quiet Administrator

There are many hypotheses circulating about who might be chosen to replace Mr. Pitt. Some informed observers believe that the White House will want to pick someone with a tough cop reputation, such as Gary Lynch, a former SEC enforcement chief who is now general counsel to Credit Suisse First Boston.

But others suggest that the White House may chiefly want a quiet, competent administrator who will keep the SEC out of the headlines.

Mr. Pitt, who didn't quite fit either of those categorizations, has many admirers in the securities bar, including many who represent hedge funds. Some of those admirers said this week that they were dismayed at the political ineptitude that forced his resignation.

The events that led to this decision include Mr. Pitt's decision to push through William H. Webster as chairman of the newly created Public Company Accounting Oversight Board on a party-line vote, Oct. 25.

"This is not the right job for [Mr. Webster], said SEC Commissioner Harvey J. Goldschmid, expressing his vigorous dissent that day, "at least when a candidate with the qualifications and expertise of John Biggs [former head of the pension investment fund TIAA-CREF] is available and willing to serve. Bill has not been involved in the accounting issues the oversight board faces; he has no real accounting expertise; and the oversight board must deal with demanding, complex matters on tight time schedules."

In following days, the public learned that Mr. Webster, former director of the Federal Bureau of Investigation and of the Central Intelligence Agency, was also until this July the chairman of the audit committee of a corporation facing investor fraud lawsuits from its stockholders. The corporation, U.S. Technologies Inc., fired its outside auditor, BDO Seidman, after Seidman advised that the company was in need of stronger internal controls.

Mr. Webster has said that he informed Mr. Pitt of his involvement with U.S. Technologies. Mr. Pitt apparently kept the information to himself, so that the other commissioners knew nothing of it when they approved Mr. Webster for the post. Over the weekend, Republican Senators began distancing themselves from Mr. Pitt, which likely helped him in deciding it was time to go.

The Morning After

Wednesday, the morning after resigning, Mr. Pitt showed up for work--presiding over a public hearing on new rules for attorneys representing issuers before the Commission. He drew a laugh from those sitting around the table when he said, "unlike some other things we do in this agency, these rules are likely to excite some public attention." He will continue to serve as chairman of the SEC in the immediate future, in order to smooth the transition.

The proposed rule, drafted by the SEC staff in accordance with section 307 of the Sarbanes-Oxley Act of 2002, requires an attorney to report evidence of a material violation of securities law or breach of fiduciary duty. Under the proposed rules, a lawyer would have to report such evidence to the chief legal counsel of the issuer or an analogous officer, and only in the event of an inadequate response to report to the audit committee, another committee of independent directors, or the full board of directors. Finally, after intra-corporate appeals are exhausted, a lawyer would be expected to blow the whistle if necessary to halt ongoing criminal activity.

Late in that meeting, Mr. Goldschmid spoke of Mr. Pitt's departure in respectful terms. "This is not the time to talk about the chairman's legacy," he said, but on such issues as real-time enforcement and disclosure it will be considerable, he said, and "this morning's rule making will add to that legacy."

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