Harvey Pitt: Accounts angel who supped with the devil

A few weeks ago Harvey Pitt hosted a breakfast for senior newspaper columnists at the Securities and Exchange Commission's offices in Washington. One writer, hoping to ambush the SEC's controversial chairman, came armed with an article Pitt wrote a few years ago, when he was a top-flight Wall Street lawyer. In it, Pitt had recommended that clients destroy sensitive documents before they could be used against them – advice that seemed to find echoes in the SEC's investigations into Enron and its shredder-happy auditor, Arthur Andersen.

A few weeks ago Harvey Pitt hosted a breakfast for senior newspaper columnists at the Securities and Exchange Commission's offices in Washington. One writer, hoping to ambush the SEC's controversial chairman, came armed with an article Pitt wrote a few years ago, when he was a top-flight Wall Street lawyer. In it, Pitt had recommended that clients destroy sensitive documents before they could be used against them – advice that seemed to find echoes in the SEC's investigations into Enron and its shredder-happy auditor, Arthur Andersen.

But if the journalist wanted to get a rise out of Pitt, he was challenging the wrong man. The chubby, pugnacious 57-year-old merely lent back in his chair, nodding as if in rapture. To a stunned room, he turned and said: "Aaaaah. That's brilliant."

Attacks on his integrity are water off a duck's back to Harvey Pitt. In the year since President Bush brought him in to replace the venerable Arthur Levitt as head of America's financial watchdog, Pitt has fended off scores of calls for him to resign and batted away dozens of fast balls from Congress and the press. This week, he could have the last laugh as he emerges as a hero who saved American capitalism from itself.

Critics characterise Pitt as a poacher turned gamekeeper – but he is actually a gamekeeper turned poacher turned gamekeeper again. The bearded, Brooklyn-born, New York educated lawyer started his career at the SEC when he was just 23. He rose quickly in the regulator's hierarchy: he was executive assistant to the then SEC chairman, Ray Garret jnr, by the time he was 28 and general counsel for the SEC before he was 30.

In 1975, following a well-worn path where bright young lawyers learn their trade in American government institutions and then use the knowledge to help the private sector get around the law, he left to make a fortune on Wall Street. Over the next 25 years he was one of the top securities lawyers in the US, representing everyone from the investment banks Merrill Lynch and Morgan Stanley to arch arbitrageur Ivan Boesky (who went to jail for stock manipulation), the American Institute for Certified Public Accountants and, most controversially of all, Arthur Andersen.

Pitt was brought in from private practice last year by George Bush, using the happy coincidence of the retirement of the Democrat hammer of Wall Street, Arthur Levitt, to hire someone who everyone thought would be more in keeping with the Bush administration's "business friendly" stance. Initially, Pitt was welcomed in Washington: his nomination was approved by 100 votes to nil on the Senate and 21 votes to nil on the congressional committee vetting the appointment. However, the Enron affair and the SEC's legal action against Arthur Andersen, which in effect closed the firm, changed all this.

Pitt's critics – and they range from former Goldman Sachs boss turned New Jersey Democrat Senator Jon Corzine, to publicity-hungry New York District Attorney Eliot Spitzer, who accused the SEC of "lacking leadership" – have used his links with Wall Street to suggest Pitt has serious conflicts of interest.

But he is too cute to be caught out like that. Though he had to sit out 29 of the first 275 votes taken by the SEC, because of potential conflicts, he is now drawing a line under his links with his former paymasters. "I cannot carry the past with me for ever," he told a congressional committee last month. "I have no intention of practising law ever again. So all the concern of me currying favour with my clients misperceives who I am."

And in a recent interview he added: "This will inevitably sound self-serving but the fact is that there is an enormous advantage to the public to have somebody who knows about the securities business. It would be unthinkable to deprive people of my expertise."

This final comment betrays Pitt's real weakness: an arrogance and egotism which, coupled with a hard-bitten New York sense of humour, leads him to make public statements and take hostile stances that get him into trouble. Though he, quite rightly, says the problems that caused the collapse of Enron and WorldCom existed before he came to the SEC, the fact is they erupted on his watch. The way he dealt with the ensuing crisis of confidence in the American financial system is under intense scrutiny. And he didn't get off to a particularly good start.

Pitt arrived at the SEC saying he didn't believe there was a need for fundamental reform of the way business was conduc- ted. This contradicted the stance of his predecessor Arthur Levitt, leading him to come out against some of Pitt's positions. Pitt retaliated.

In a television interview he denigrated Levitt's record, saying: "Let me ask you this. I believe that Arthur Levitt was very well motivated and wanted to serve the public interest. The question is, what did he achieve? What got done?"

He went on to say: "The people who didn't solve these problems are now the ones that are critical of any effort to try and solve the problems ... They are criticisms from people who don't want the SEC to succeed. This is going to be done and it's going to done for the benefit of investors and be done the right way." The interviewer then said she hoped he was right and Pitt replied: "I know I am."

The feeling on Wall Street is that Pitt has made two critical errors in his time at the SEC. The first was to, in effect, close down Arthur Andersen over the Enron scandal. The SEC said it would not accept audits signed by the firm while it conducted a criminal prosecution of Arthur Andersen for shredding documents related to Enron. This was like saying that if a supermarket was found to have sold bad eggs – and covered up the fact – then no one should buy meat, fish or milk from it until it had been found guilty of the eggs cover-up. Arthur Andersen was consigned to history, but that has left only four major auditing firms, and most experts believe this will make it harder to punish any miscreants in future.

The second error was for Pitt to meet with Eugene O'Kelly, the senior partner of accountants KPMG, in April at a time when the SEC was investigating KPMG's auditing of Xerox, which later revealed more than $8bn (£5.2bn) of accounting errors. Pitt claims Xerox was not discussed. Even if that is so, the meeting was a monumental public relations error.

But this will all be forgotten if his potential masterstroke works. In the wake of the Enron accounting scandal, he has demanded that the directors of the 947 largest corporations in America swear that all is what it appears to be in their accounts by this Wednesday, 14 August. The move was derided at the time as an unnecessary knee-jerk reaction to Enron – after all, accounts had to be audited and wasn't it the auditors' job to verify the accounts? However, the public do not trust the auditors. Nor do they understand the accounting shenanigans that were endemic in US business. But they do understand "I swear to tell the truth, the whole truth and nothing but the truth". They know that if chief executive officers lie under oath, they can be sent straight to jail.

So US corporations with questionable accounting practices have a choice: come clean or sign the pledge and face the consequences. The likes of Bristol- Myers Squibb, Merck and Aon have had to come clean. By the end of last week, more than 100 had signed the pledge. By Wednesday anyone who hasn't should expect their shares to fall heavily.

Will this restore confidence in the financial statements of US companies? It had better do. Because if it doesn't, it won't only be Harvey Pitt's reputation that will be fundamentally damaged.