The New York Times reported this morning that Public Company Accounting Oversight Board's new chairman, William Webster, told them he headed the audit committee of US Technologies (OTCBB: USXX.PK), now pennies from destitution and drowning in lawsuits, when it "voted to dismiss the outside auditors ... after those auditors raised concerns about internal financial controls."
Webster further said he told SEC Chairman Harvey Pitt twice during the pre-vote process. Pitt did not tell the four other SEC commissioners who would vote on Webster's appointment, and assured Webster that it would "not pose a problem." Last Friday, the commissioners appointed Webster in a 3-2 vote along party lines.
Three days later, Webster called Pitt to say he had heard of a governmental investigation into possible fraud by the CEO. Still no problem for Chairman Pitt.
The Times article appeared in this morning's paper. At 10:00 a.m., the Times reported that Pitt asked the inspector general to review the Webster appointment. [Friday morning, Nov. 1: Subsequent reports indicate that other SEC Commissioners, not Pitt, requested the investigation].
There are five possible explanations for Pitt's astonishing behavior:
1. He honestly believed there was no issue and that Webster was qualified to serve, despite his being in charge of an audit committee doing, what the textbooks will call, the signature act of the Enron era.
2. He thought it would never come out.
3. He thought it would come out, but it wouldn't make a difference, either because the public wouldn't care or it would be after the election, and perhaps Congress would be in Republican hands.
Now, you can call me paranoid, but this is a very real possibility, too:
4. Pitt knew it would come out and that he and/or Webster would have to go. Then he would never have to appoint someone who's really qualified, like John Biggs, and further preserve his future earnings power and collegial relations when he returns to representing accountants as a private-sector lawyer (which may now be sooner, rather than later).
How would that work? Remember President Nixon's Supreme Court nominees Haynsworth, Carswell, and -- finally, when everyone was tired out --Rehnquist, who altered the face of American law (for better or worse, depending on your view) more than any of the others ever would've? Or President Reagan with Bork, Ginsburg, and then Kennedy. We'll just keep sending you people until you give up and give us someone worse, either politically or intellectually (sorry for the stab at Kennedy, but that's the verdict of legal minds on both sides).
In this cynical view, Pitt -- and anyone above him calling the shots, if any -- figures: What's the risk? They (meaning we individual investors) will never get John Biggs, so let everyone exhaust themselves.
For all four possibilities, the conclusion is the same: Pitt lacks the ethical standards and judgment to serve as the leader of the governmental body charged by law to "protect investors and maintain the integrity of the securities markets" (taken from the SEC's website, by the way). He is either incompetent or evil. This is far, far beyond politics.
He must go. Immediately. Sooner would be better.
Webster deserves some credit for coming forward, but not much. It all seems a bit too disingenuous for the former federal judge and FBI and CIA director. He, too, must go. That he could think, for one moment, that he's qualified to exercise this responsibility, given his role at US Technologies, shows a capacity for ethical and judgmental lapses that do not serve the American investing public. The fact that he did not take himself out of the running, but rather thought disclosure to Pitt was enough, reveals he has spent too much time in the high-level, public-private revolving door club, where it's all about faulty discretion and mutual protection.
At the very least, it shows why his ignorance of accounting matters far more than his law-enforcement experience.
If investors don't rise up in anger and demand Pitt's head and Webster's speedy exit, then we are complicit in this crime against the public. Call or write your congresspersons immediately, and tell your neighbors.
If you want to catch up on the unfolding drama, we have it all at The Motley Fool. Check out the SEC Fights for Funding and the second part of Bill Mann's The Great PR Caper. The New York Times story is available online (free subscription required).