Arthur Levitt knows a thing or two about restoring investor confidence and strengthening the public markets. During his tenure as chairman of the Securities and Exchange Commission, Levitt zeroed in on issues like auditor independence and greater corporate disclosure. He continues to champion those issues today. He joined David and Tom Gardner on The Motley Fool Radio Show on June 28. Below is a transcript of their conversation.

TMF: We are going to revisit the big story of the week -- the disclosure of massive accounting irregularities by WorldCom. It's a scandal that has once again shaken investor confidence. It's a scandal that highlights some of the problems in today's public markets.... Joining us is Arthur Levitt, former chairman of the SEC.

Arthur Levitt: Good to be with you, fellows. You are great protectors of investors.

TMF: How concerned, Arthur, should the individual investor be about WorldCom and the public markets in general today?

AL: I think the individual investor should view this as more evidence that their markets have got to return to normalcy by squeezing some of the excesses of the '90s out of it. Clearly the numbers game was one of the most atrocious excesses of the '90s.

TMF: Chairman Levitt, you have mentioned in the past that investors are potentially the most powerful lobbying force in the country, and yet you have also pointed out they are the least organized. What can individual investors do to help restore integrity to the public markets?

AL: I think we have got to start thinking about banding together in terms of interested groups. Investors ought to know which members of Congress are investor-friendly. There are very, very few of them. They ought to hold them accountable by establishing scorecards for investor-friendly legislation. I think only if they begin to flex their political muscle will they be able to try to right some of the inequities that have been created by a combination of forces that do not have investors' interests first at heart.

TMF: OK. So a new era of investor activism.

AL: That is absolutely right.

TMF: How can I tell -- this is a trillion-dollar question -- how can I tell which companies have integrity and which don't?

AL: Well, you could read my new book when it comes out. (Laughs) There are some guideposts, obviously. There are things to look for in financial statements. There are things to look for in terms of management's analysis of the company. There are real warning signs that astute investors can look at, but I think most importantly, investors should start with a view of skepticism. They should become intellectual investors rather than emotional investors. They should be careful, and they should be skeptical. They should ask questions, and if they don't understand something, they simply shouldn't buy.

I think that the failures of Enron and WorldCom and other companies are partially failures of investors to recognize companies that are selling for a thousand times nothing, but chances are they may be worth only that.

TMF: What do you say, Chairman Levitt, to the 50-year-old established professional, actually who I was speaking with last night, who has got investable assets, yet who says the public markets are right now, in his opinion, littered with criminals who will never do jail time for crimes far more heinous than bank robbery?

AL: My belief is that humiliation and embarrassment have done more to change behavior than almost any rule or legislation I can think of. That has already happened. In my judgment, many of these white-collar criminals will go to jail. We are in an era of excess right now, and you will see regulators acting like bulldogs rather than French poodles. You will see legislators coming out with proposals that would have been unthinkable as recently as a month ago. The question is whether this will endure. That is a combination of whether the media continues to focus on it and whether investors get caught up once again in the hype and euphoria and stop being skeptical investors.

TMF: Arthur, looking back over your life and American business and observing American business, do all these scandals point to an erosion in values in corporate America, or would you think of this as stuff that has always gone on, and we are just now noticing in a mass-media way?

AL: Well, I think both in a sense. I think clearly our society is so, our corporate society is so competitive that if companies A, B, and C are moving toward or over the line, D, E, and F won't be far behind. Over the past two decades, we have clearly seen an erosion of ethical values. But if you look back to Teapot Dome and Penn Central and some of the other great scandals, and looked at the headlines following those events, you could probably substitute Enron and Tyco and WorldCom, and you would think you were in the same era. This is a little bit worse because more people are involved, more dollars are involved, and the egregiousness of the behavior is really astoundingly terrible.

TMF: The auditor for both Enron and WorldCom was Arthur Andersen. Are the problems we are seeing more specific to Arthur Andersen, or is there a more pervasive problem with the auditing industry?

AL: I think it is much more pervasive. I think it -- certainly Arthur Andersen has had more than its share of these problems -- but for the time being, I think the role of the Audit Committee will be enhanced, and I think auditors will be far more careful, fearing the slippery slope of Enron and what it did to Andersen.

TMF: OK. Let us close with our game Buy, Sell, or Hold. We have played this together before. We will toss out things happening in our society and our financial world, and ask you if they were stocks, would you buy, sell, or hold, and a sentence or two about why.

First up, the likelihood that Enron executives will do jail time.

AL: Buy.

TMF: Why is that?

AL: Because I think coming out of this, it is hard to see the Justice Department settling for anything less than jail time.

TMF: OK. Buy, sell, or hold -- this is a funny one. The future of the stock market.

AL: Buy. Once again, stock markets have been threatened with extinction for almost 75 years, and I have found that stock markets are harder to kill than roaches. They managed to reinvent themselves in different ways, and in very creative ways, I might say.

TMF: OK. A final one. It wouldn't be The Motley Fool Radio Show unless we had a little fun here. So, buy, sell, or hold the likelihood that we will one day see a celebrity-boxing match featuring former SEC Chairman Arthur Levitt squaring off against current SEC Chairman Harvey Pitt?

AL: Sell. No way. Harvey and I are friends, and I think we respect one another.

TMF: But if that did happen, who do you think would win, Arthur?

AL: (Laughing) I don't know. I am going to leave that one.

TMF: I think Harvey just identified you in our previous interview with him a few weeks ago as a guy in much better shape than he is.

AL: (Laughing) OK.

TMF: We are really just sort of ripping off of that.

Chairman Levitt, thanks for joining us on The Motley Fool Radio Show.

AL: You are welcome.

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