In 2002, the political imbroglio informed by asensio.com’s short-selling investigation of U.S. Technologies, Inc. (UST) led to an unprecedented episode, in which an incumbent chairman of the Securities and Exchange Commission, Harvey Pitt, was seemingly forced to resign. At first glance, it appears that the New York Times’ report about Chairman Pitt’s supposed personal vetting of a prominent appointee, William Webster, led to the resignation. Mr. Webster was appointed by the SEC to serve as chairman of the then-newly-created Public Company Accounting Oversight Board (PCAOB); Mr. Webster had previously served as Director at both the FBI and the CIA. The PCAOB was created to oversee auditors in the wake of the Enron fraud. Mr. Webster was the first chairman of the PCAOB, but resigned shortly after his appointment in the wake of The New York Times’ reporting on his role at UST.
Mr. Webster also served on the board of directors and audit committee of UST, a penny stock company that was the subject of fraud accusations beginning in 2001. asensio.com’s involvement in the short-side investigation of UST led it to provide information about the company to the New York Times. Mr. Webster was allegedly involved in firing the firm’s auditors after they raised concerns about the firm’s accounting practices. Based on the information and analysis below, it appears that reporters at the Times not only intensified Mr. Webster’s UST involvement, but also used the circumstances to create unsubstantiated allegations against Chairman Pitt.
Within months of The New York Times articles about Mr. Webster, the CEO of UST, C. Gregory Earls, was indicted on charges of criminal fraud. In April 2004, Earls was convicted on 22 counts of fraud, sentenced to 10 years in prison, and ordered to pay $21.9 million in restitution.
Below we present a detailed analysis of The New York Times’ reporting on the Webster-Pitt affair. It is excerpted from the book Journalistic Fraud: How The New York Times Distorts the News and Why It Can No Longer Be Trusted by Bob Kohn. Kohn argues that allegations made by the New York Times were apparently false: that Pitt knew about Webster’s involvement with UST and that Pitt chose to hide the information from other SEC Commissioners. In Kohn’s view, the Times pursued a vendetta against Pitt.
We believe the episode highlights several issues that are important to asensio.com’s work: the fact that even reputable media sources can at times be biased in their presentation of facts, the phenomenon of questionable companies aligning themselves with powerful government and business leaders, and the political dynamics of securities regulation.