Arthur Levitt

Financial expert

Born Arthur Levitt Jr. in 1931, in New York, NY; son of Arthur Sr. (a government official) and Dorothy (a teacher) Levitt; married Marylin Blauner (a psychiatry professor), 1955; children: two. Education: Williams College, B.A., 1952.

Addresses:

Office—Pantheon Books Publicity Dept., 1745 Broadway, New York, NY 10019.

Career

Worked in the marketing department of Time magazine, New York City, 1950s; tax–shelter salesperson with Oppenheimer Industries in Kansas City, 1959–63; broker, Carter, Berlind & Weill, New York City, 1963, became partner, then president by 1970; chair and chief executive officer of the American Stock Exchange, 1978–89; founder of Levitt Media, 1986; co–founder of a small–business lobbying organization, the American Business Conference; chair, New York City Economic Development Corporation, 1989–93; appointed to chair of the U.S. Securities and Exchange Commission by President Bill Clinton, July, 1993; re–appointed, 1998; retired, 2001; worked for the Carlyle Group; signed book deal with Pantheon that produced book about investing, 2002.

Awards:

Hunter College/Franklin and Eleanor Roosevelt Institute, Distinguished Public Service award, 2003.

Sidelights

Arthur Levitt's eight–year tenure as chair of the U.S. Securities and Exchange Commission (SEC) was the longest in the 70–year history of the regulatory office. Yet it was notable for a far greater achievement—or near–achievement, as it were: from 1993 to 2001 Levitt battled with some of the most powerful executives in corporate America in an attempt to reform the way in which they presented their financial data to Wall Street and, ultimately, the stock–market investing public.

Levitt's efforts were met with resistance from Wall Street executives, corporate boards, the accounting industry, and finally even members of Congress. Some of those same politicians later expressed outrage when Texas–based Enron collapsed just eleven months after Levitt left office, due to exactly the kind of financial malfeasance, sanctioned by its accounting firm, that the SEC chair had predicted. Levitt detailed this battle in his 2002 book, Take on the Street: What Wall Street and Corporate America Don't Want You to Know: What You Can Do to Fight Back. In it, declared New York Times reviewer Thomas A. Bass, "Levitt is unsparing in his criticism of corporate greed and puffery."

Born in 1931, Levitt was an only child who grew up in the Crown Heights section of Brooklyn, New York. His grandparents were Orthodox Jewish immigrants who lived with the family, and an aunt was Broadway star Ethel Merman. Levitt's father was elected New York State comptroller six times, serving for 24 years that included a period of the 1970s when New York City faced bankruptcy. Levitt Sr., in charge of keeping an eye on the New York State employee pension funds, adamantly refused the appeals of politicians that some of those reserves be used to purchase municipal bond issues, which would have temporarily staved off the city's looming financial crisis—though at the expense of the workers' pension funds. Both his and the retirement fund of Levitt's mother—a second–grade teacher in a Brooklyn public school for 38 years—were there, as well as those of thousands of others, and "my father placed the well–being of New York retirees above all other considerations," Levitt wrote in Take On the Street.

Levitt did not immediately pursue finance as a career path. He studied English at Williams College, penning a senior thesis on the playwright Lillian Hellman before he graduated in 1952, and worked in the marketing department of Time magazine as his first full–time job. In 1959, the now–married Levitt moved to Kansas City to take a post with Oppenheimer Industries, and sold cattle herds and ranches to the wealthy as tax shelters for the next few years. One of his clients suggested he would do well on Wall Street, and so in 1963 Levitt returned to the New York area with his family and began at Carter, Berlind & Weill, a brokerage firm, to sell securities and bonds in a cutthroat, highly competitive environment.

Levitt rose through the ranks at the firm, garnering an increasingly high–profile roster of clients that included conductor Leonard Bernstein and composer Aaron Copland, and eventually became its president by the end of the decade. The firm eventually became Shearson Hayden Stone, which was sold to the American Express Corporation in 1981 and later became Citigroup. But Levitt also began to see a change in business ethics during the decade, as brokerage firms scrambled to stay profitable in the merger–mania of the era and became increasingly focused on the bottom line. Brokers, for example, earned their commissions not on how well their clients' money performed, but on the number of transactions they executed. "I grew uncomfortable with practices and attitudes that were misleading and sometimes deceptive," Levitt wrote in his book.

Invited to head the search committee for a new chair and chief executive officer for the American Stock Exchange, Levitt was offered the job himself and took over in 1978. The Amex, as it was called, was the smaller fish on Wall Street, nowhere near as powerful as the New York Stock Exchange (NYSE), in poor financial shape at the time and, some predicted, on the verge of folding altogether. Levitt was credited with rescuing it, in part by modernizing its operations and trading floor during his eleven–year tenure. Some began to suggest that he might do well in politics, and even New York State Governor Mario Cuomo urged him to run for a U.S. Senate seat. However, Levitt's wife was said to be adamantly disinterested in public life.

After he left the Amex in 1989, Levitt chaired the New York City Economic Development Corporation and, with onetime Commerce Secretary Robert Mosbacher, established a small–business lobbying organization in Washington called the American Business Conference. A skilled political fund–raiser with a wealth of Wall Street and Washington contacts of both party stripes, he set up a 1992 dinner for Democratic presidential hopeful Bill Clinton that raised $750,000. When Clinton took office, Levitt was stunned to learn that he was being considered for the SEC job.

The SEC is a federally funded agency that monitors Wall Street. It was created in 1934 by President Franklin D. Roosevelt, who battled tremendous opposition from America's financial elite over its creation and regulatory authority. Its mandate was to protect the average investor from fraudulent practices on the part of brokerage firms—practices that had led, in part, to the October of 1929 stock market crash and subsequent worldwide economic depression. Levitt accepted the post, and quickly went to work putting through reforms that helped the average investor better understand the market. He forced mutual–fund companies to issue prospectuses in plain English, for example, and instituted new rules for the municipal bond market.

Levitt next went after the National Association of Securities Dealers, and forced it to institute new rules in response to charges of price–fixing on its NASDAQ trading floor. He was also wary about the practice of allowing stock options granted to employees as part of their compensation packages to be treated as an expense on corporate income statements—a little accounting trick that would have major repercussions in the booming bull market of the late 1990s. This was one of the battles he lost, however, along with the one he launched against the accounting industry that sanctioned such practices. Technically, the major American accounting firms—Price Waterhouse, Coopers & Lybrand, Deloitte & Touche, Ernst & Young, K.P.M.G., and Arthur Andersen—were not part of the SEC's domain, but they nevertheless played a key role in corporate finance: such firms had risen to prominence in the twentieth century by their auditing expertise. Any publicly traded company had to hire such a firm to review its books and ensure that its quarterly and annual financial statements—on whose publication the company's share price either rose or fell—were accurate and not misleading.

In the 1980s, however, those Big Six accounting firms—which became the Big Five during Levitt's tenure after Price Waterhouse's merger with Coopers & Lybrand—began selling an array of other services to their corporate clients. Consulting—for management compensation, information–technology systems, merger analysis, and other services—proved a far more lucrative revenue source than auditing, but presented a potential conflict of interest. As Levitt explained in Take On the Street, as quoted in BusinessWeek, at some companies more than three–quarters of management compensation was in stock options, which "gave executives an incentive to use accounting tricks to boost the share price on which their compensation depended.… We [at the SEC] began to see a pattern. Corporations were playing with their earnings calculations until they arrived at the best possible number. Earnings press releases revealed only the good news. Auditors, increasingly captive of their clients, would give them the clean audits they wanted, despite lots of chicanery."

In a few cases, companies were caught red–handed, and were compelled by law to issue a restatement of their earnings; as a result, irate shareholders who had lost money on the company's stock then filed lawsuits. Two years into his tenure, Levitt fought a Republican–sponsored initiative that made it harder for shareholders to sue in such cases, but his power was no match against the business interests allied to lobby for the passage of the Private Securities Litigation Reform Act, and he stepped out of the fight. It set the tone for the rest of his tenure, however: lobbyist Jeffrey Peck told New Yorker writer Jane Mayer that that particular battle was the starting point for a "really bad feeling" between the accounting profession and Levitt. "It was as if two people had gone out on a first date and had a bad time," Peck explained. "But the rules required them to keep dating."

In 1998, President Clinton re–nominated Levitt for a second five–year term, a rarity for an SEC chief, and Levitt began a more determined campaign to force the accounting industry to reform. He went to the Financial Accounting Standards Board, an independent body located in Norwalk, Connecticut, which sets rules for the accounting profession, but they proved less than willing to agree to his proposals, arguing that the industry did an effective job of policing itself. Levitt, his critics claimed, didn't understand the rules of the "New Economy" and, furthermore, there was simply no "smoking gun"—no genuine proof of any instance of wide–scale fraud between corporations and the accounting firms that provided both auditing and consulting services.

As the war of words intensified, Levitt was contacted by no less than 47 members of Congress urging him to reconsider his stance, and became even more irate when he learned of the massive campaign donations made by the accounting industry to many legislators. "It was the ultimate nexus of business and politics," Levitt told Mayer in the New Yorker. "If there was ever an example where money and lobbying damaged the public interest, this was clearly it." Finally, when some politicians threatened to reduce the SEC budget, Levitt agreed to a compromise in November of 2000 that forced the Big Five firms to simply disclose the amount of non–audit services they provided to their corporate clients. He stepped down as SEC chair three months later, along with the rest of the Clinton team.

Eight months later, in October of 2001, the failure of Enron became front–page headlines. It was revealed that executives at the Houston–based oil pipeline and energy–trading company had inflated its net income by $600 million. Its auditor, Arthur Andersen, was eventually indicted on obstruction of justice charges for feverishly shredding those "smoking gun"–type documents in the weeks following the initial reports. Millions of dollars invested in Enron's stock were lost overnight, and it became the biggest bankruptcy in United States history.

Levitt was by then absorbed in writing Take on the Street with finance journalist Paula Dwyer. The book earned laudatory reviews and even became a best–seller. The Economist noted that Levitt's "expose of the bad behavior and conflicts of interest that beset investment banks, stock exchanges, and company bosses is devastating," and that his tales of the political maneuvering to block his attempts at reform "are sobering to believers in American democracy."

In his other post–SEC career, Levitt has an office at the Carlyle Group, a private equity firm. An avid power–boater, Levitt regularly takes friends, Wall Street executives, and politicians on wilderness retreats out West. His own fortune was once estimated at $30 million, and he has homes in Connecticut, Santa Fe, New Mexico; Washington, D.C., and New York City. The same year his book was published, his successor at the SEC was forced to resign, and President Bush signed the Sarbanes–Oxley Act into law, which prohibits accounting firms from doing consulting work for companies that they audit. In the rounds of interviews he did to promote his book, Levitt was often asked if the United States economy could ever recover after the crisis of confidence that came in the wake of Enron and other revelations of corporate fraud. "I believe that embarrassment and humiliation have already caused societal change," he told Fortune's Janice Revell. "You've seen CEOs of companies that have been in the limelight suddenly sounding like latter–day Elmer Gantrys, calling for the expensing of stock options and so on. This would have been laughed at a few years ago."

Selected writings

(With Paula Dwyer) Take on the Street: What Wall Street and Corporate America Don't Want You to Know: What You Can Do to Fight Back, Pantheon Books (New York City), 2002.

Sources

Books

Levitt, Arthur, with Paula Dwyer, Take On the Street: What Wall Street and Corporate America Don't Want You to Know: What You Can Do to Fight Back, Pantheon Books (New York City), 2002.

Periodicals

Bond Buyer, October 22, 1993, p. 3.

BusinessWeek, September 30, 2002, pp. 74–80.

CFO: The Magazine for Senior Financial Executives, May 2003, p. 63.

Corporate Board, January–February 2003, p. 32.

Economist, October 26, 2002.

Fortune, October 14, 2002, p. 64.

Institutional Investor, January 1998, p. 48.

Investment News, June 10, 2002, p. 22.

Money, November 1, 2002, p. 65.

Newsweek International, July 15, 2002, p. 64.

New Yorker, April 22, 2002, p. 64.

New York Times, November 24, 2002, p. 28; June 8, 2003.

—CarolBrennan