Chertoff Spurns SEC Top Spot

DOJ big latest to say thanks, but no thanks, to running the commission; who's next? Also: SEC to offer up new auditor independence rules, while the corporate restatements keep on coming. Plus: What do the Adelphia case and soul music have in common?


Does anybody want this job?

On Thursday, Bloomberg reported that President Bush planned to ask assistant attorney general Michael Chertoff to replace Harvey Pitt as head of the Securities and Exchange Commission. But just hours after the report, the 48-year-old seemingly turned down the offer, saying he’s “happy” to remain as head of the Justice Department’s criminal division.

Observers say Chertoff would have brought instant credibility to the position. The former U.S. Attorney first made a reputation for himself as the lead prosecutor in the celebrated Mafia commission trial in 1986. Under the supervision of then—U.S. Attorney Rudolph Giuliani, Chertoff put away mob bosses Tony Salerno, Junior Persico, and Tony Ducks Corallo—all top members of the infamous Mafia commission.

“He would be a tough, aggressive head of the SEC, who will restore faith in its enforcement capabilities,” Eric Holder, deputy attorney general in the Clinton Administration, told Bloomberg.

Chertoff has long been tough on corporate crime. As U.S. Attorney in the early ’90s, he went after several companies in New Jersey that stole from their employee pension plans. He is also widely credited with playing a key role in the Bush Administration’s crackdown on corporate crime, helping direct investigations into alleged fraud at Enron Corp. and WorldCom Inc.

But apparently the man who prosecuted the commission doesn’t want to run the commission. “Michael Chertoff is happy in the job he currently holds,” Justice Department spokesman Bryan Sierra told Bloomberg. “He looks forward to helping the President and the attorney general continue fighting the war against terrorism.”

One reason why Chertoff would have been a good choice to succeed Pitt is that he has already passed the stringent FBI background checks for his current position. So he could have been approved by Congress pretty quickly.

What’s more, observers say he’s both nonpartisan and tough on corporate crime. Indeed, in an interview back in 1991—a decade before the Enron scandal—Chertoff said: “It demoralizes legitimate businessmen when they see their competitors cheating and getting away with it.”

So when will the Administration find a replacement for Pitt? The SEC chairman “is an important position,” White House spokesman Scott McClellan told the wire service. “We are moving as quickly as possible.”

Other rumored candidates include former SEC commissioners Laura Unger and Joseph Grundfest, former U.S. District Judge Stanley Sporkin, and former SEC general counsel James Doty. In fact, Unger, a commentator for CNBC, has enthusiastically said on the air she would be glad to accept the position.

Peter Fisher, undersecretary of the Treasury for financial markets, is another candidate, according to Bloomberg, citing an Administration official. Fisher reportedly has called for rigorous disclosure to restore investor confidence.

However, he reportedly told Bloomberg Radio a week ago: “I’m not a candidate for that job. It’s not my skill set.”

It’s not clear at this point why anybody—Unger notwithstanding—would want to head the SEC these days.

SEC Plans New Rules for Auditors

Next Tuesday the SEC plans to propose additional rules for auditors under the Sarbanes-Oxley Act.

The rules, which are to be proposed at an open meeting, would specify the kinds of information that must be retained by auditors for a five-year period after completing an audit or review of a company’s financial statements.

The proposed rules would require auditors to retain work papers and other documents that form the basis of the audit or review, as well as memoranda, correspondence, communications, other documents, and records (including electronic records) that are created, sent, or received in connection with the audit or review and contain conclusions, opinions, analyses, or financial data related to the audit or review.

The commission also said it will consider amendments regarding auditor independence to enhance the independence of accountants who audit and review financial statements and prepare attestation reports filed with the commission.

In addition, the SEC plans to declare that an accountant would not be independent from an audit client if any partner, principal, or shareholder of the accounting firm who is a member of the engagement team received compensation based directly on any service provided or sold to that client other than audit, review, and attest services.

Former Adelphia Finance Exec Pleads Guilty

There may be no mistaking him for the Godfather of Soul. But James Brown, Adelphia Communications’s former vice president of finance, apparently knows how to sing.

On Thursday Brown pleaded guilty to conspiracy, securities fraud, and bank fraud, thus becoming the first former Adelphia senior executive to admit to his role in the cable company’s alleged scheme. Adelphia is currently operating under Chapter 11 bankruptcy protection.

Brown, who apparently is cooperating with federal investigators, pointed the finger at John Rigas, the company’s founder and former head, and two of his sons, according to published accounts.

“With the assistance and agreement of others, I helped to manipulate and overstate earnings,” he said during the proceeding in U.S. District Court in Manhattan, according to the Associated Press.

Brown also said the decision to make false statements involved Rigas; his sons Timothy and Michael, who are Adelphia’s former chief financial officer and former executive vice president for operations, respectively; and Michael Mulcahey, former director of internal reporting of treasury.

The three Rigas men and Mulcahey have all pleaded not guilty to the fraud charges.

“I knew that making such misstatements would mislead analysts who follow the cable industry as well as investors,” Brown reportedly said.

He added, “The others involved in the conduct and agreement I have referred to include John Rigas, Tim Rigas, Michael Rigas, and Michael Mulcahey, among others.”

Brown, who is scheduled to be sentenced April 14, could spend as many as 45 years in prison, although he is expected to receive a reduced sentence.

Restate Roundup: Hanover’s Compression, Callaway’s Mulligan

The parade of corporate restatements marches merrily along.

On Thursday alone, another half dozen or so companies announced restatements, SEC probes, or updates of restatements or investigations. Here’s the rundown:

  • Dynegy Inc. restated financial statements for the three years ended December 31, 2001, stemming from its controversial round-trip trades. As a result, the embattled energy trader that last year tried to buy Enron Corp. cut earnings by $53.6 million and added $280 million in debt.

The company’s management noted that Dynegy’s restated financial statements are unaudited and include “previously disclosed restatements” relating to a natural-gas trading arrangement known as Project Alpha. In September, Dynegy paid a $3 million fine to the SEC to settle charges of accounting impropriety and engaging in two round-trip trades.

  • Callaway Golf asked for a five-day extension to file its quarterly results so the SEC can complete a company-initiated review of its proposed accounting treatment of a warranty reserve reversal in the third quarter of 2002.

Callaway management knows a little something about reserves. According to CFO PeerMetrix, the golf-club maker is sitting on a whole lot of cash. In fact, the company’s optimal cash ranking is one of the lowest in its industry. (To see Callaway’s optimal cash ranking—compared with Rawlings Sporting Goods—click here.)

  • Gateway said it expects the SEC to conclude its investigation of the computer maker by this quarter or next quarter. The company voluntarily restated 2000 earnings in February 2001, and has since furnished the SEC with information primarily related to its fiscal year 2000.

Management at Gateway said it is cooperating fully with the investigation and it believes there will be no impact on the company’s current financial position, results of operations, or cash flows.

Gateway also acknowledged it settled outstanding class-action shareholder lawsuits filed in December 2000 and early in 2001. The company’s management said it denied all allegations and did not admit any liability as part of the settlement.

  • Management at Hanover Compressor Co. said on Thursday that the SEC started formally investigating the company. Hanover has done a little compressing of its own this year, reducing previously stated earnings three times after discovering accounting errors. The company indicated the SEC, which had requested information earlier in the year, was satisfied with the company’s cooperation with the inquiry and had acknowledged that Hanover had taken steps to remedy the problem.

The natural-gas compression company last month said it would restate three years of financial results, lowering revenues by $5.1 million and profits by $2 million for 1999. That follows similar restatements made in March and August for results from 2000 and 2001.

“Hanover understands and appreciates the SEC’s need to put in place the appropriate processes to allow the SEC staff to fully and fairly administer their inquiry,” said Mark Berg, senior vice president and general counsel, in a statement. “We look forward to continuing to fully cooperate with the SEC staff and to building on the positive relationship we have created with the staff.”

  • Motient Corp. management said in a regulatory filing that on November 8, it initiated discussions with the SEC about the appropriate accounting for certain transactions and the need to file reaudited or restated financial statements.

Back in August, the company, which is currently in bankruptcy, said it has been studying its accounting related to the formation of and transactions with Mobile Satellite Ventures LP in 2000 and 2001, and the sale of certain transportation assets to Aether in 2000.

“As a result, it is possible that these transactions should have been accounted for differently, and this could result in a material change to the reported financial results in certain periods, including the years ended December 31, 2000 and 2001, and the three months ended March 31, 2002,” it added in its filing.

  • The SEC has issued subpoenas to Veritas Software Corp., requesting information on transactions the company had with America Online, according to Dow Jones. A Veritas spokeswoman told the wire service the company has turned over the requested documents and is cooperating with the SEC’s ongoing investigation.

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