Doubts surface on SEC nominee

By Adam Levy
Bloomberg News Service

NEW YORK — President George W. Bush calls William Donaldson, his nominee to head the Securities and Exchange Commission, "a strong leader with a clear mission to vigorously enforce our nation's laws against corporate corruption."

William Donaldson is President George W. Bush's nominee to head the Securities and Exchange Commission. Advertiser library photo

As chairman of the New York Stock Exchange, Donaldson fought in the early 1990s to let foreign companies trade on the Big Board without meeting U.S. accounting standards.

Last year, he used the word "crazy" to describe Regulation Fair Disclosure, the SEC rule that bars companies from giving information first to favored investors.

And in April, Donaldson served on the compensation committee of an Internet company whose shares plunged 99 percent. The committee voted to forgive the company's $200,000 loan to its chief executive. Such loans have since been banned by federal legislation.

"If he comes into the SEC with that kind of agenda, he might as well be walking in carrying his own head," said John Markese, president of the American Association of Individual Investors, a 150,000-member shareholder advocacy group.

Three shareholders of Aetna Inc. have claimed in a federal stock fraud suit that Donaldson helped hide accounting misstatements when he was chairman of the second-largest U.S. health insurer for 14 months ending April 1, 2001.

Nine days after he stepped down, Aetna's shares fell 20 percent as the company revealed that it had understated medical expense reserves by at least $90 million. Donaldson's lawyer has asked a judge to dismiss the suit.

"His background is Wall Street- and CEO-centric," said Herbert Denton, president of Providence Capital Inc., who led dissident shareholders during Donaldson's tenure at Aetna. "He has not been a friend of investors."

Donaldson did not return messages left at his New York home.

Experience, integrity

The U.S. Senate Banking Committee is scheduled to hold hearings on Donaldson's nomination after the new session of Congress begins in January. Sen. Richard Shelby, an Alabama Republican, is in line to chair the panel.

In announcing the nomination Dec. 10, Bush said Donaldson "understands the capital markets," having co-founded Donaldson, Lufkin & Jenrette, once the nation's seventh-biggest securities firm, and "worked for the interests of the small investor" as head of the NYSE.

Bush cited Donaldson's experience as the founding dean of the Yale University Graduate School of Management in New Haven, Conn., as a sign that "he sees business as a calling which demands high standards of integrity." Donaldson also worked as undersecretary of state for President Richard Nixon and special White House counsel and adviser to Vice President Nelson Rockefeller during the Ford administration.

Since 1977, Donaldson has been on the boards of five public companies: Aetna, Philip Morris Inc., Honeywell International Inc., Bright Horizons Inc. and Mail.com Inc., now known as Easylink Services Corp. He is a board member of the Lincoln Center for the Performing Arts and chairman of the Carnegie Endowment for International Peace. He is a trustee of the Aspen Institute, a member of the Foreign Policy Association and the Health Insurance Association of America.

"It's exactly what you need at the SEC: some leadership, some experience and credibility," said James Hearty, executive director of the $25.8 billion Massachusetts state pension fund.

"He's a safe choice," said William H. Miller III, whose $9.4 billion Legg Mason Value Trust fund has outperformed the Standard & Poor's 500 Index for 11 years. "He certainly knows Wall Street."

Industry intimate

Given Donaldson's ties to Wall Street, he may be unwilling to confront old colleagues or change longstanding practices such as using equity research to win investment banking business, steps that are necessary to restore investor confidence, said Charles Munger, vice chairman of Berkshire Hathaway Inc.

"How often does it happen that someone who was an intimate member of an industry is really the right person to clean it up?" Munger asked. "Will anybody be as tough as I'd like to see? The answer is no."

If confirmed by the Senate, Donaldson would replace Harvey Pitt, who submitted his resignation Nov. 5 after criticism from Democrats in Congress such as Senate Majority Leader Tom Daschle of South Dakota, that he was too close to former law clients among Wall Street firms and large accountants. Pitt trailed state authorities, such as New York Attorney General Eliot Spitzer, in efforts to eliminate conflicts of interest on Wall Street.

Sen. Jon Corzine, D-N.J., former co-chairman of Goldman Sachs Group Inc., said in a Dec. 11 interview with Bloomberg that he expected the Banking Committee to examine the allegations in the Aetna suit along with other aspects of Donaldson's record.

Corzine predicted Donaldson would be confirmed easily, "unless there is some surprise" in his resume.