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SEC won't let sun shine in

Insight on the News, Jan 21, 2003 by John Berlau

One of the first orders of business as the 108th Congress convenes is the Senate confirmation of William H. Donaldson, President George W. Bush's nominee to chair the Securities and Exchange Commission (SEC), which oversees the U.S. capital markets. Donaldson, cofounder of an investment-banking firm and former chief executive officer of the New York Stock Exchange, would replace Harvey Pitt, the embattled Bush appointee who resigned in November.

Given depressed earnings of public companies and the number of corporate scandals, the SEC, which occupies a large but nondescript building near the U.S. Capitol, is being looked at to restore confidence in the stock market. The agency is insisting that public companies let the sun shine in and disclose more information to their shareholders.

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Yet INSIGHT has found that the SEC is not practicing what it has been preaching in terms of disclosure and accountability. It is refusing to make public documents requested by INSIGHT and the public-interest group Judicial Watch that may shed light on the Clinton administration's possible role in getting Enron exempted from securities laws put on the books to protect investors.

Pitt was blamed in the media and by congressional Democrats for his "close ties" to Wall Street, because he had represented accounting firms as an attorney and didn't favor new regulations such as the forced separation of accounting from consulting services. Yet Pitt was the one who took actions to step up enforcement, such as garnishing compensation of the executives of Waste Management Inc., a company charged with bilking shareholders by cooking the books in the 1990s. Pitt did make mistakes, but he was blamed largely for corporate scandals such as Enron that occurred under the watch of the Clinton administration and Pitt's predecessor, Arthur Levitt.

Ironically Levitt, a Wall Street player and big-time Democratic fund-raiser before he was appointed chairman, has emerged as the hero of the corporate scandals in the establishment media now that he is in the private sector. If only the big, bad Republican Congress hadn't opposed the regulations Levitt championed to ban auditors from providing consulting services to the companies they audit and force companies to expense stock options, the refrain goes, disasters such as Enron may never have occurred. But the reality is sinking in that Congress never suspended the numerous securities laws the SEC already had at its disposal in the Levitt era to go after fraud, and that the Clinton/Levitt SEC, for whatever reason, not only failed to enforce the existing rules against Enron's dealings, but gave the company special breaks.

Without blaming Levitt directly, an October report from the Senate Governmental Affairs Committee, then under Democrat control, chastised the Levittera SEC for its lax treatment of Enron during the Clinton years. Noting that the SEC failed to review any of Enron's annual reports after 1997--reports many experts say signaled the company's practice of hiding debt in various partnerships--the committee concluded that "the SEC missed potential opportunities to identify serious problems before the house of cards fell." Furthermore, the report states that "the leeway" from securities laws the SEC gave to Enron through various exemptions "appears in fact to have been abused by the company in ways that ultimately played a role in Enron's collapse."

In particular, the Senate committee remarked on an exemption the SEC granted Enron in 1997 that, as INSIGHT noted months before the report came out [see "Who Cleared That Enron Exemption?" March 4], may have opened the door for the company to set up many of its dubious overseas partnerships. The broad exemption meant that Enron did not have to comply with any of the provisions of the Investment Company Act of 1940, which regulates companies, including mutual funds, that have more than 40 percent of their assets in partnerships or subsidiaries in which they do not have a controlling interest. Since Enron was a minority shareholder in many of its offshore partnerships, the corporation could have fallen under the act without this exemption. If Enron had fallen under the act, experts say, it would have had to disclose more about its partnerships and barred its executives from investing in them.

The committee concluded that while an exemption from the 1940 act for a certain project may have been appropriate, the blanket nature of the exemption was troubling. The SEC, the report notes, "had not incorporated any conditions into the exemption it granted that would have required Enron to demonstrate in the future that it still merited an exemption, and the SEC staff did not routinely follow up on their own." This, in turn, allowed the company to engage in practices that "have ultimately been linked to problems for Enron and its shareholders" the committee concluded.

According to a 1997 article in Time magazine, President Bill Clinton sent memos to his chief of staff, Thomas "Mack" McLarty, telling him to push the federal Export-Import (Ex-Im) Bank and the Overseas Private Investment Corp. (OPIC) to lend Enron money to build a nuclear-power plant in India. This was around the time in 1996 that Enron gave $100,000 to the Democratic National Committee. The agencies ended up loaning Enron $1.7 billion--money for which taxpayers now are on the hook--for this and other overseas projects, according to WorldNetDaily.com.

SEC won't let sun shine in

Insight on the News, Jan 21, 2003 by John Berlau

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