SEC's Pitt bears watching since he's switched `teams'

October 31, 2001|By Jay Hancock

AS A TOP securities lawyer, Harvey L. Pitt regularly defended investors, brokers and executives charged with duping the little guy.

Insider trading or bookkeeping fraud. Whatever the technique, if you were accused of fleecing public investors behind a screen of deceit or silence, Pitt was your $500-an-hour man.

After Ivan Boesky got secret tips to buy stock in takeover candidate Nabisco Brands, when Lloyd's of London was accused of hiding billions in potential insurance losses, when Microstrategy Chairman Michael J. Saylor was suspected of accounting fraud, Pitt stood in their corners.

Now he is sworn to enforce the laws he spent so many years shielding his clients against. As the new chairman of the Securities and Exchange Commission, Pitt regulates the accountants, stock exchanges and brokers who once wrote him big checks.

While such turnabouts are always grounds for concern and vigilance, they don't disqualify Pitt or most other public servants recruited from the opposing team at half time. Better an excellent industry veteran for a regulator than a simon-pure ignoramus.

After all, one of the best SEC chairmen ever, Pitt's predecessor Arthur Levitt, was once chairman of the American Stock Exchange. Outer sentinels and inner conscience usually ally to ensure that regulatory foxes really do guard the chickens.

Pitt isn't going to take a dive if the SEC enforcement division presents a good case for prosecuting his former clients.

But small investors should still pay attention to the new chairman. Levitt was an extraordinary champion of the little fish, the Charles Schwab client with six stocks in a $15,000 account, and it's not clear yet whether Pitt is going to honor Levitt's legacy.

Last week was the first anniversary of Levitt's "Regulation FD," a useful restraint on free speech designed to furnish public investors with the same information available to Wall Street, at the same time. Standing for "fair disclosure," the rule prohibits corporate officers and public relations flacks from sharing significant business developments with brokerage analysts before releasing them to the public.

In the pre-FD era, companies would coach analysts privately about important results before a press release surfaced. The idea was that the investment professionals would "filter" and interpret the information before it trickled down to Joe Doakes.

Analysts would tip off big institutional clients about changes in revenue or earnings projections, new products or other key news and, not infrequently, trade for their own accounts. Much money was made before Main Street got clued in.

Now, like Martin Luther bypassing the Roman Catholic Church in 1517 for a direct pipeline to the divine, the small investor can go right to the source. We still need the priestly caste of analysts for soothsaying and interpretation, but anybody can now listen, live, to companies' quarterly analyst conference calls without worrying too much about offstage whispers afterward.

Not surprisingly, Wall Street hates the new rule.

Why not? It eliminated what amounted to legal insider trading and forced analysts to work harder for results with less confidence in their accuracy.

The game is "Who Wants to Be a Billionaire?" and Levitt took away all the lifelines.

Some analysts' complaints are legitimate. Corporations have used Regulation FD to fend off inquiries for all sorts of information not covered by the rule. For instance, in a classic case of counsel overkill, many corporate lawyers have banned all private discussions about all business matters by all company officials.

In fact, the new regulation applies only to senior officials speaking about financially significant developments to outside shareholders or Wall Street professionals. It doesn't prohibit talks with the press, and it doesn't ban, say, store managers from discussing local results with enterprising analysts.

Many analysts hope Pitt will maim Regulation FD while pretending to touch it up. Pitt once represented the Securities Industry Association, the measure's biggest opponent. He was reported to have criticized the rule while in private practice, and at his Senate confirmation hearing he said Wall Street's complaints "raised ... some very serious concerns."

But Pitt has also told Congress that the concept behind the rule is "unassailable, which is that no one should have an unfair advantage in the marketplace."

He's right.

Joseph E. Stiglitz, George A. Akerlof and A. Michael Spence shared the Nobel Memorial Prize in Economic Sciences this month for work on how the nondisclosure of information hurts markets by giving parties precisely the kind of unfair advantage Pitt mentioned.

Akerlof studied the used-car trade. Spence looked at appliance warranties, and Stiglitz analyzed insurance and banking markets.

They all drew the same conclusion: Market systems work better when relevant information is shared equally among everybody.

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