SEC boss surprised at level of corporate wrongdoing

Securities and Exchange Commission chairman William Donaldson is making his presence felt, write Kathleen Day and Carrie Johnson.

William H. Donaldson says his biggest eye-opener since becoming chairman of the Securities and Exchange Commission (SEC) less than three months ago is how much wrongdoing he sees.

"I am surprised at how prevalent it is in the economy," he said. "I'm surprised at the day-in and day-out, steady level of malfeasance that comes in under the radar."

Given Donaldson's close ties to Wall Street and to the Bush family, many shareholder and consumer advocates wondered if he'd have the backbone to challenge the status quo of the investment community, which a series of scandals has revealed to be riddled with unfair practices that have cost investors billions.

But Mr Donaldson says no one should be surprised that he's shown a tough, independent streak in his new job. It's a characteristic that business and consumer leaders, as well as lawmakers, noticed last month, for example, when he faced down board members of a new national accounting oversight panel, and again, when he publicly upbraided the chairman of investment banking giant Morgan Stanley, Mr Philip Purcell, for playing down the company's role in a recent scandal.

This week, the agency he leads broke new ground in agreeing a settlement with WorldCom, which agreed to pay a record $500 million (€427 million) fine over charges stemming from one of the biggest accounting fraud cases.

Under the tentative deal, the second-largest US long-distance telephone and data services company would pay the penalty and the funds would then be doled out to victims of the roughly $11 billion accounting fraud.

"I came into this job to call them as I see them," he said.

Many market-watchers are crossing their fingers. "Now that we've had a chance to grade on record rather than on rhetoric, the take is pretty positive," said Mr Patrick McGurn of Institutional Shareholder Services, a company that advises pension funds and other large investors on corporate governance issues.

Mr Donaldson's ultimate mission is to restore investor trust in the markets, but his first job was to restore order in the SEC, sources say.

Morale among SEC staff members had eroded under his predecessor, Mr Harvey Pitt, whose autocratic style and poor judgment fuelled numerous controversies, forcing him to resign 18 months after President Bush appointed him.

Mr Donaldson's immediate tasks included restoring trust among staffers and the five SEC commissioners, picking a chairman of the new accounting panel and increasing funding for an overworked organisation at a critical juncture. They also included asking NASD and the New York Stock Exchange - the industry's two self-regulatory organisations - to re-examine their policies in light of their failure to police securities markets during the boom years.

And it included working past the acrimony between Mr Pitt and New York State Attorney General Mr Eliot Spitzer so state and federal regulators could reach the recent $1.4 billion settlement with 10 top Wall Street firms on charges they routinely issued bogus stock research reports to win investment-banking business.

Members of Congress have since questioned the Wall Street settlement, asking why only a few lower-level executives have been individually sanctioned, while no top managers at the firms have been charged, even though their failure to properly supervise their staff permitted unfair practices to flourish.

During closed-door discussions by the five SEC commissioners before they voted to approve the settlement, Mr Donaldson was as outraged as the other four at supervisory lapses by top executives such as Citigroup chairman Mr Sanford Weill, sources said.

Sources said they expected Mr Donaldson to reiterate what he confirmed in a news conference last week announcing the settlement: that the SEC is investigating whether top executives, including chief executives, should be charged.

Generally, the SEC's top man is likely to shun publicity in favour of a behind-the-scenes approach that builds consensus and permits compromise, government sources familiar with his style say.

They point to his handling of the selection of a new chairman of the Public Company Accounting Oversight Board, created by Congress last year to reform the troubled audit industry.

Last month, in a widely praised move, the SEC picked Mr William McDonough, president of the New York Federal Reserve Bank, for the job.

Agency sources say Mr Donaldson worked closely with other SEC commissioners to develop a short list of candidates to lead the board and gave the impression that he considered everyone's choices.

Furthermore, say agency sources, although Mr Donaldson has the unilateral power to hire top staffers, he made sure that three top deputies he recently brought on board first met with the other commissioners.

His approach hasn't always gone over well. Mr Donaldson and accounting board members got into a dispute last month over what powers Mr McDonough should have to hire and fire top board employees. Mr Donaldson favoured a "strong chairman" model similar to the one used by the SEC and by himself when he worked on Wall Street and when he headed insurance giant Aetna.

Accounting board members, however, had hoped for a more egalitarian approach and wanted to protect the jobs of staffers who might give unpopular advice, according to sources familiar with the dispute.

Ultimately, the two sides compromised by agreeing that the board's chairman must consult with the other four board members before a staff member is fired over a policy dispute.

No one has any hard feelings, sources say. "In general, the commission is a much happier place under Bill's leadership," said SEC commissioner Mr Harvey Goldschmid. - (Washington Post Service)