Outgoing Securities and Exchange Commission chairman Arthur Levitt had harsh words for corporations that practice deception in their accounting practices, as well as words of warning and encouragement to small investors, during his last official town meeting January 16. “Say ‘no’ to companies that play games with their earnings, that practice balance sheet cosmetology,” Levitt exhorted audience members who had gathered in an historic Quaker meeting house in downtown Philadelphia. “Say ‘no’ to option grants in the dead of night to executives without submission to shareholders. Say ‘no’ to regulators who take their eyes off the interests of investors,” he added, not exempting his compatriots in the regulatory agencies from culpability when it comes to deceiving small investors. “Say ‘no’ above all to politicians who care more about corporate interests than individual investors.” Despite being installed for another five-year term as SEC chairman in 1998, Levitt, 69, said he had decided in the fall to step down early this year no matter who was elected president. The town meeting in Philadelphia was the 44th of Levitt’s seven-and-a-half-year term as SEC chairman, and he said he chose Philadelphia for his last session with the public because of its long history as a bastion of freedom of expression. Levitt, a former chairman of the American Stock Exchange, clearly did not mince words during his speech and the forum of audience questions that followed. He deviated from his prepared text often, mostly to inject sardonic metaphors on otherwise serious topics. “A chat room is nothing but graffiti,” flaying the fly-by-night information about stocks and other investments generated by the use of the Internet, he said at one point. “If you are dumb enough to invest in what you see on a bathroom wall, you deserve what you get.” But more often than not, Levitt used the forum to warn small investors what to watch out for when corporations, brokers and mutual funds try to “spin” and “hype” their financial reports. “Look out for companies with a real affinity for earnings press releases that highlight in the grandest terms ‘pro-forma’ earnings,” he said. “In a press release with so-called ‘pro-forma’ numbers, some companies wax poetic about just the earnings side of the ledger and ignore costs that may tell a story of impending dangers. “In some companies, these substitutes for the real bottom line are just a way of saying, ‘Don’t look at our true earnings. Let us take you to a special place, where you never have to diet, never say you’re sorry, never sit in traffic’.” Brokers drew special ire from Levitt, but he said investors themselves bear a responsibility to weed out bad ones. “The very first question that a person should ask his or her broker is, ‘How do you get paid?’, he said. “If you are paying your broker through commissions, your interests may not be necessarily aligned with his – and sometimes that leads to trouble. “Ask your broker, ‘Do I have choices about how I pay you? Should I be paying a flat fee regardless of the number of transactions?’ If you don’t get a straight answer, or one that makes sense for you, take your business elsewhere. You have a right to a broker that works in your best interest, and to financial advice that is not tainted by salesmanship or self-interest,” said Levitt. “But you also have an obligation to find out how your broker is being paid, to ask the uncomfortable but important question, ‘What’s in it for you?’” Levitt saved a lot of head-shaking and sarcasm for his criticism of what he feels is overt deceptive marketing by mutual funds. He was particularly incensed about two issues: The myth of past performance and the misnaming of funds. “Ads for the ‘hot new fund’ [boast] returns of ‘over 100%’,” he said. “We’ve seen funds citing one-year returns ending with dates like April 13, May 3 or June 10. Now, if your investment strategy coincides with the Chinese calendar, or somehow targets the period between Sadie Hawkins Day and National Flower Week, maybe these time frames may make sense to you. “Please don’t get caught up in the hype of past performance. Maybe a fund invested early in a few very successful IPOs, giving it unusually high returns,” he said. “Research and know what you are investing in. Remember what folksinger Pete Seeger once said: ‘Education is when you read the fine print; experience is what you get when you don’t.’ “Also, don’t rely on a fund’s name as the only source of information about its investments and risks,” he said. “Your definition of value may be stocks that pay regular dividends. The fund manager may interpret it as beaten-down Internet stocks. As the winds shift direction, you shouldn’t be surprised to see that what was called yesterday’s Tech fund is now today’s Value fund.” During his tenure at the SEC, according to his official biography, Levitt has overseen such initiatives as strengthening the independence of auditors and the profession’s self-regulatory functions; improving the quality of financial reporting, including strengthening the oversight role of corporate audit committees; leveling the information playing field through Regulation Fair Disclosure, which requires companies to release important information to all investors at the same time; and required the use of plain English in mutual fund investment literature, public company communications with investors, and SEC communications with the public. The Meeting House crowd gave Levitt a prolonged standing ovation after his 30-minute speech, but many still wanted to pepper him with questions afterwards. One member of the audience was particularly angry that the SEC only collected $200,000 in restitution from a 15-year-old New Jersey boy who had promoted stocks over the Internet and then traded them on the information he himself had provided. “I share your concern about that issue,” Levitt told the questioner. He said the SEC made its decision because it felt that the courts might treat the boy lightly due to his age. But he was upset that the boy’s schoolmates, and even his parents, had treated him as a hero for making money unconventionally. “I know if my son did the same thing, that would be an indictment of the way I brought him up.” Levitt agreed with one questioner that Congress should not dilute laws that help class action suits against companies, despite some “spurious use” of that kind of legal method. But he disagreed with a questioner who suggested that companies that preserve founding families’ dominance with two classes of voting shares were putting the individual investor at a disadvantage. “My own view is that there are some great companies with two classes of stock,” said Levitt, citing the New York Times Company as evidence. “But as a general rule, as an investor that could be a warning sign for you.” Levitt took time to cite a number of SEC attorneys and other staffers who had accompanied him on the trip. Although he had fought a unionization effort by those staffers during his term, he had also badgered Congress to raise their salaries, which he said were among the lowest in Washington agencies. The effort, he added, had not yet been successful because salary raises for SEC personnel were often paired in bills that would otherwise weaken the Commission’s rules. Levitt also did not give strong marks to Congress when it came to worrying about investors’ rights, but that may well be the fault of the investor-citizens themselves. “Just about every day, one special interest group or another in our markets is up on Capitol Hill persuading congressmen or senators why a certain issue is important to them,” he said. “If it’s important to them, you can bet that, more times than not, it’s important to you. Do you know that there is only a tiny handful of members of Congress who associate themselves vocally and aggressively with investor protection issues? That’s not in your interest either. “You have the right and the obligation to have your voice represented at the table when these issues are being discussed,” he said. “Whose job is it to represent you? Certainly, the SEC, your state regulators and Congress each have a responsibility. But it must be you who hold them accountable.” Levitt did take time to compliment two Congressmen, one from each side of the political spectrum. He said that he thought Sen. Phil Gramm (R., Texas) and Rep. Ed Markey (D., Mass.) both took extraordinary amounts of time to work on legislation and regulations preserving investors’ rights. As for his own plans, one newspaper report said Levitt was considering a role as an investor advocate when he leaves office in February. While he was skeptical about some aspects of the Internet when it came to investing, Levitt said that in some respects, it was a boon to knowledgeable users. He urged investors to tap into the Edgar site, for example, to get the proper financial filings of companies they may want to invest in. He also said that within the next two weeks, the SEC itself will unveil an improved Website (
He did not predict who his successor might be and refused to speculate what he or she might do in the SEC, but he did promise the crowd one thing. “I will certainly make sure that my successor continues these town meetings and urge [him or her] to bring members of Congress along.”
