Suzan Mazur: SEC Chair Arthur Levitt Jr. Unplugged
WHY I JOINED THE CARLYLE GROUP AND OTHER REVELATIONS FROM FORMER SEC CHAIR ARTHUR LEVITT, JR.
by Suzan Mazur
(Special to From The Wilderness)
Introduction from From The Wilderness Editor Michael C. Ruppert
FTW's regular readers will recognize many of the names mentioned by former SEC Chair Arthur Levitt. They will remember that in 2001, just months before September 11 th, FTW decried the purchase of Mexico 's largest drug money laundering bank, Banamex, by Citigroup under then CEO Sandy Weill. They will remember our early post-9/11 stories focusing on the Carlyle Group and its insidious insider connections, as well as the fact that the bin Laden family were investors, and that Osama's brother had been attending a Carlyle meeting just blocks from the White House on that fateful day.
The point is that in the financial world Arthur Levitt is regarded as the clean, no-nonsense SEC boss. As the accounting scandals of 2002 destroyed hundreds of billions of dollars in shareholder equity, much of it in pension funds, Washington and New York insiders lamented, “if only Arthur were here.” Now that those scandals have faded from view and contemporary memory Arthur Levitt, the icon, cynically and disingenuously discloses his positions on a wide variety of subjects. We see him now not as a protector of integrity but as a man who is cut from a mold similar to that of one of his predecessors at the SEC, William Casey. The same William Casey who was Ronald Reagan's CIA director and who masterminded an explosion of CIA-shepherded drugs into the bloodstreams of America's children and into Wall Street's stocks, bonds and bank accounts.
FTW welcomes veteran international journalist Suzan Mazur to our pages with her elegantly understated sense of outrage. – Michael C. Ruppert
February 20, 2004, 1800 PST ( FTW ) -- Former SEC chair Arthur "squeaky clean" Levitt in recent "unprepared" comments to an investors board meeting in Pasadena defended his decision to join The Carlyle Group as senior adviser after leaving the SEC in 2001, saying further that he'd been a consultant to Carlyle before President Clinton appointed him securities chief in 1993. America 's longest serving SEC chair also admitted he was "taken by total and absolute surprise" by what he termed the "greatest threat to our markets" -- the mutual funds scandal. He blamed his misplaced "prepared" speech on a possible Republican saboteur, threw mud at Joe Lieberman and Congress, did not spare Martha Stewart, and anointed New York Attorney General Eliot Spitzer to sainthood.
Levitt also confessed that he first got his business feet wet selling cattle for five years in Kansas (proclaiming himself an animal rights champion now) and after that he opened a brokerage business with former Citicorp CEO Sandy Weill. Since leaving the SEC, Levitt has also joined the board of U.S. Investigations Services (USIS) which gathers data on all federal job applicants, maintains security clearance files on all civilian employees and – as a private company – operates deep underground in a U.S. government facility near Boyers, Pennsylvania as a part of what has come to be known as “The Shadow Government”.
Excerpts of Levitt's off-the-cuff comments and responses to questions from the board of the Los Angeles County Employees Retirement Association (which has $93 million in funds with Carlyle, an investment many at LACERA oppose for ethical reasons) follow.
The Carlyle Group is a private equity group. It's a group that I was a consultant for before I went to Washington. I knew David Rubenstein, who I understand has been out here to talk to this board. And I knew Frank Carlucci because he served on the board of the American Stock Exchange with me. And I liked them. And I trusted them. When I went to Washington, I resigned from the board.
They've become the largest private equity group in the world today managing some $14 billion of funds. They had been accused in the press of having funds that were provided by Middle Eastern interests. And they were accused of investing in companies which were defense companies that provided various kinds of weapons.
And indeed a minuscule part of their $14 billion -- less that $100 million -- came from the Middle East . And they have made a number of very successful investments in the defense industry. But much more in real estate. Much more in agriculture. Much more in financial services than in the defense business.
To the best of my knowledge they have never been sued. To the best of my knowledge they have never been the subject of any SEC investigation or action [Carlyle purchases of privately-held companies are not subject to SEC regulation.]
I am, along with James Baker -- the former Secretary of State, and former Prime Minister [John] Major of the UK [George H.W. Bush has resigned from Carlyle since September 11, 2001 ], an advisor to Carlyle. And I'm proud of that association and have no reason to feel embarrassed by it. And their results have been -- I think you would be told -- their results are probably the highest of any private equity firm in America .
And probably the greatest damage to our markets in my judgment -- the greatest threat to our markets in recent years has been the scandal that appeared in the mutual fund market. I was taken by total surprise. Total and absolute surprise. From my years at the SEC, I felt that mutual funds of America were really a part of a system that was fairly regulated and really cared for investor interest. I'm not sure when the problems developed [emphasis added]. But I suspect it was part of the overall hype of the runaway market that caused so many of these aberrations…
The average fee paid to a director of a mutual fund in America today is $242,000. How willing is that director to challenge the people who put him or her on the board? Well, I think what's changed in the boardroom is not a rule or a regulation but it's been humiliation and embarrassment. Nobody wants to see themselves appear on the business page of the Wall Street Journal or the Los Angeles Times…
You can look at the statements that are going to come out and -- believe me -- the SEC is coming out with new disclosure statements on mutual funds…"
The SEC brought on average 400 cases a year during my eight years there -- which is a fraction of a number of instances of corporate fraud in America . The SEC has no criminal power. They have to work with the Justice Department to bring criminal actions. And most US Attorneys are too preoccupied with drug cases or physical violence to concern themselves with securities fraud. But more and more of them have come to an understanding of what securities fraud is. And that's why I said before that the enforcement efforts of the SEC must be supplemented by enforcement actions of the stock exchanges and private rights of actions.
The SEC was severely strapped for resources during my eight years. Congress consistently cut back on our budget requests. Now they have twice the budget they had before and that money is going into enforcement.
I think that Eliot Spitzer has performed a vast public service. He has constructively used a little-used law called the Martin Act in New York State to bring cases that the SEC would have taken several years to bring, because in several respects the federal laws were not as easy to work with as the New York State law was with the Martin Act. And for that reason I feel that the Eliot Spitzers of this country should be allowed to work with federal regulators in order to bring actions that may have escaped me. . .
And I think the future protection of investors you quite correctly point out is very largely a function of enforcement. Also a function of private rights of action. There's a Congressman who comes from Orange County named Chris Cox who's trying very hard to diminish the ability of individuals to sue. I don't support his view of the world in that regard.
Stock options are related to a much larger issue in America -- the issue of executive compensation. Rather than paying executives obscenely high salaries, which somehow or other we're doing anyway, somehow the idea of giving out stock options became the vogue in the period of the 90s when new high-tech companies were formed. Lots and lots of stock options were granted. Every option that is granted diminishes the value of the stock, the common stock that others may own. And we waged a strong campaign by the independent accounting standard board to account for those stock options appropriately.
That was fought tooth and nail by the Congress. Senator Lieberman running for the Democratic nomination for President of the United States led a coalition in the Senate which voted with only two exceptions to try to overrule the independent standard setter on this issue. Anytime we had a question, a rulemaking that was intended to protect investors, I would receive a call from Congress to appear before a Congressional committee and justify that action.
We have the New York Stock Exchange scandal of enormous consequence…
The SEC brought an action against NASDAQ while I was there. Brought an action against the New York Stock Exchange. The Philadelphia. The Chicago. Because self regulation works up to a point. But every few years the oversight process has got to work and actions have to be brought holding them to task.
Now what I mean by that is. The New York Stock Exchange or the NASDAQ market place or the Pacific Stock Exchange would say to you that their principal concern is the investor. That's poppycock. That's nonsense. It's laughable. Their principal concern is their members' interests. And after that comes the firms. The Merrill Lynchs. The Citicorps. That bring them business. And after that -- far after that -- come investors' interests."
My feelings about this are -- if Martha Stewart lied, and I believe she did, she should be treated no differently than anybody else who violates our securities laws. She shouldn't be punished for it because she's Martha Stewart. Nor should she be given a pass. My own feeling was that if she had settled this case, she probably would not have gone to jail. If a jury convicts her, I think she probably will go to jail. And I think it's a question of -- do they have the evidence not that she traded on inside information. But that she lied about it.
And I question there always is a tendency for prosecutors to not give a pass to a high profile kind of case because that's the way they send a message to the rest of America. They don't have the resources to look at every transaction. And only by getting public attention to a practice that is pretty general are they able to drive home the importance of not lying about your security transactions."
© Copyright 2004, From The Wilderness Publications, www.copvcia.com. All Rights Reserved. May be reprinted, distributed or posted on an Internet web site for non-profit purposes only.
-- Suzan Mazur's previous coverage of Carlyle appeared in Sam Smith's Progressive Review ( How Bush Got Bounced From Carlyle Board - www.prorev.com ) and was subsequently picked up by Salon.com, Democracy Now! and Pacifica Radio, UPI, Washington Times and the British press -- Guardian and Telegraph. Mazur is a Middle East and South Asia specialist. Her reports have appeared in The Economist, The Financial Times, Forbes, Newsday, Philadelphia Inquirer, and on PBS, CBC and MBC. She has been a guest on McLaughlin, Charlie Rose, and Fox television (including O'Reilly, who pulled their one-on-one segment on polygamy before broadcast).