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5/8/2003

Donaldson surprised at wrongdoing

By Kathleen Day and Carrie Johnson
The Washington Post

WASHINGTON — William H. Donaldson says his biggest eye-opener since becoming chairman of the Securities and Exchange Commission 12 weeks ago is how much wrongdoing he sees.

“I am surprised at how prevalent it is in the economy,” he said Tuesday. “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 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 last week, when he publicly upbraided the chairman of investment-banking giant Morgan Stanley, Philip Purcell, for playing down the company’s role in a recent scandal.

“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 Patrick McGurn of Institutional Shareholder Services, a Rockville, Md., company that advises pension funds and other large investors on corporate governance issues.

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 Donaldson’s predecessor, Harvey Pitt, whose autocratic style and poor judgment fueled numerous controversies, forcing him to resign 18 months after President Bush appointed him.

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 organization at a critical juncture. They also included asking NASD and the New York Stock Exchange — the industry’s two self-regulatory organizations — 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 Pitt and New York State Attorney General Eliot Spitzer so state and federal regulators could reach last week’s $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 are expected to question 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, Donaldson was as outraged as the other four at supervisory lapses by top executives such as Citigroup Chairman Sanford Weill, sources said.

Sources said they expect 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.

Donaldson is likely to shun publicity in favor of a behind-the-scenes approach that builds consensus and permits compromise, government sources familiar with his style say.

They point to Donaldson’s 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 William McDonough, president of the New York Federal Reserve Bank, for the job.

“In general, the commission is a much happier place under Bill’s leadership,” said SEC Commissioner Harvey Goldschmid.