Former SEC Chairman Harvey Pitt: Goldman Sachs, SEC Enforcement, and Lessons For Our Times

Prestigious firms sued by the SEC, subjects of negative reports, forced to endure angry Congressional testimony arising out of their involvement in the financial crisis of 2008, already provide important lessons for corporate executives. Kalorama Partners CEO Harvey Pitt—the former SEC chairman who has penned a Compliance Week column for seven years—makes his fifth appearance at Compliance Week’s annual conference with a look at the lessons executives can learn from current events.

These are my notes, live from the keynote:

He started off by comparing himself to Phil  from Groundhog Day, forced to repeat the events over and over again. Of course he also quoted Yogi Berra: It’s like deja vu, all over again.

He was critical of the new financial reform because he feels that the reasons for the Great Panic have not been accurately identified. As our economy has become more complex and interconnected with other global economies, the impact of not understanding is getting greater.

There is no way government fiat, by itself, can eliminate misconduct. It does not mean we should not put laws into place. But we need to get people to be willing to not enter into that conduct. Government will fail in identifying all of the bad behavior.

The question with Goldman is for companies charged by the government survive and deal with the fallout from being sued. Goldman lost billions in market value. He thinks the case will never get litigated and its just a matter of big the pound of flesh will be. Goldman cannot afford to litigate the case.

Strong defenses are not a guaranty of success. You need to think about the damage by entering into the battle in the first place.

He went through lessons to be learned:

  1. Bad things happen to good companies. You need a gameplan for a big problem happening.
  2. Critical to avoid the Alexander Haig problem. Make sure you know who will be in charge when a problem arises.
  3. The race is to the swift.
  4. Tight lips sink ships. You need to have effective communication with your directors. They need to know.
  5. Time and tide wait for no one. You need to get on top of problems immediately.
  6. Ask the four questions:
    • How did we learn about this problem?
    • Was this a systemic problem?
    • Who was harmed and to what extent?
    • What assurance do we have that this problem will not occur?
  7. In crisis stay away from litigators. They want to win the case; you want to save your company.
  8. Know when to hold ’em, know when to fold ’em. Know what is at risk if things go bad, quickly.
  9. Let sleeping dogs lie. Do not accuse the government of incompetence.
  10. Don’t burn bridges. Regulators have long and enduring memories.
  11. You don’t have to be wrong for the government to be right. You other constituents matter.
  12. In a crisis, the prime word is candor. Don’t wait until you know all of the facts or are forced to break your silence.
  13. Avoid hubris. Don’t say that you were “doing god’s work” unless you’re in the clergy.
  14. Maintain a sense of humor.

During the Q&A with Compliance Week publisher Scott Cohen, the Commissioner expressed the importance of maintaining good communications with regulators.

You need to avoid the Wizard of Oz syndrome. You need to press the flesh and meet with people through out the organization. You need to put a personal face on the compliance program.

(Disclosure: I own some shares in Goldman Sachs. I bought them when the stock price went down as a result of the SEC action.)