Bush cuts Corporate Fraud Enforcement

Looks like he's gonna dance with them that brung him, er, ah... those that bought him?
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Bush Seeks to Cut Back on Raise for S.E.C.'s Corporate Cleanup
By STEPHEN LABATON

WASHINGTON, Oct. 18 — Less than three months ago, President Bush signed with great fanfare sweeping corporate antifraud legislation that called for a huge increase in the budget of the Securities and Exchange Commission to police corporate America and clean up Wall Street.

Now the White House is backing off the budget provision and urging Congress to provide the agency with 27 percent less money than the new law authorized.

Administration officials say their proposed increase is enough and that other budgetary needs, like the military and security against terrorism, make it impossible to afford more.

The decision has angered commission officials and Democratic lawmakers, who say that it reflects the administration's calculation that corporate scandals have begun to recede as a political issue. They say that the administration's more modest increase will not be able to pay for the expanded role of the agency, bring salaries up to levels at other financial regulatory agencies, finance the start-up costs of an accounting oversight board and significantly expand a staff that is already overwhelmed.

Under the corporate clean-up legislation, the commission's budget — which for years has barely kept up with inflation, let alone the steep rise in stock ownership — was authorized to increase by 77 percent, to $776 million. But as Congress wrestles with the spending measures that actually appropriate money to federal agencies, the White House is requesting $568 million for the S.E.C., officials said, or an increase of about 30 percent over last year's budget of $438 million.

Harvey L. Pitt, the commission's chairman, has acknowledged through a spokesman that the administration's level of financing will not allow it to undertake important initiatives.

The White House has put Mr. Pitt in the awkward position of having to choose between Congressional Democrats who want a larger budget and administration officials who want less. Brian Gross, the commission's director of communications, said that Mr. Pitt was concerned that the agency would not be able to do many of the technology and enforcement projects that he would like if the commission received only what the White House has recommended.

"It doesn't allow for a lot of new initiatives," Mr. Gross said. On the other hand, he said, Mr. Pitt appreciates that the White House has to juggle other budget issues that would prompt the administration to support the lower figure.

The commission's budget became a major political issue as the wave of corporate scandals illustrated the agency's difficulties in policing major public companies and Wall Street. Through most of the year, the administration opposed calls by Democrats for bigger increases in the agency's spending allocation. But after the collapse of WorldCom this summer, the president cited the larger spending increase when he signed the corporate overhaul, known for its prime sponsors as the Sarbanes-Oxley Act, at a ceremony in the East Room on July 30.

"Corporate misdeeds will be found and will be punished," Mr. Bush said then. "This law authorizes new funding for investigators and technology at the Securities and Exchange Commission to uncover wrongdoing."

The commission's finances have become a casualty of political gridlock between Congress and the administration over the budget for the entire government. Congress has passed temporary spending measures set at last year's budget levels to keep the government operating at least through the end of November.

Two months ago, the commission received an increase of $30 million over its $438 million budget from last year, which was widely considered inadequate, to begin hiring another 100 staff members to join its 3,100 current employees. As a result, nearly a year after those corporate scandals began with the collapse of Enron, commission officials say that they have struggled to keep up with their growing number of responsibilities and cases.

Senior agency officials say that they are still unable to open many of the investigations that they want and that, as cases near trial, they will be stretched thin. The agency's computer systems have not been updated in many years. The agency is unable to review the vast majority of corporate documents filed every day. And one investment house alone, Merrill Lynch, has more professionals in its legal and compliance departments than the commission's entire enforcement staff.

The problems were supposed to be fixed by the Sarbanes-Oxley Act, which set a $776 million authorized budget. But now, administration officials say Mr. Bush supports a more modest increase, of $130 million, to $568 million.

"The president does believe the S.E.C. has a substantial mission and we think $568 million is sufficient to carry that out," said Amy Call, a spokeswoman for the White House Office of Management and Budget.

Administration officials say that the budget figure in the law is too high considering the other needs of the budget. They say that the agency would be able to carry out more investigations, increase staff and raise pay levels with the more modest budget proposed by the White House.

Briefing reporters aboard Air Force One, Ari Fleischer, the president's spokesman, said it was a major accomplishment that Congress recessed without increasing any spending.

"Typically, when Congress leaves, they pay an exit fee, where spending is increased above and beyond what the Congressional budget authorized, and the taxpayers are always the victims," Mr. Fleischer said. "This year, the chain was broken."

Senator Paul S. Sarbanes, the Maryland Democrat who was the principal author of the legislation, called the White House position "disheartening" and said that its proposed budget would fall far short of what is necessary for the agency to be effective.

"I can't understand why they are taking this position," he said. "We didn't pull the $776 million out of a hat. The costs of increasing pay, hiring new staff and increasing the volume of their business presents a case for a higher budget that is overwhelming."

The law calls for $102 million for raises and $108 million for better computer systems and financing for restoring the agency after the Sept. 11 attacks that destroyed its New York offices. It also proposed $98 million to pay for 200 additional auditors, investigators and prosecutors. Budget officials estimate that the new accounting board will need from $25 million to $50 million to start. That money is to come from the commission's budget and be repaid later by the accounting profession.

In July, shortly before the measure was adopted, a Senate committee led by Ernest F. Hollings, Democrat of South Carolina, passed a $750.5 million appropriations measure for the commission. The measure has since languished as Democrats and Republicans have been unable to reach agreement in the House and the Senate on the federal budget.

Democrats said that the White House position reflected the calculation that the corporate scandals have moved to the back burner, and therefore the White House does not need to honor the provision in the legislation that calls for the higher financing.

"My sense is this is a White House that is sensing some political relief that this is no longer the issue on the table so they can take a political pass on this," said Senator Christopher Dodd, the Connecticut Democrat who heads the Senate banking subcommittee on securities and investment. "They touched the critical issues last summer and now it's gone. Now the issue is Iraq all the time."

"I think they are politically mistaken and also dangerous substantively," Mr. Dodd said. "You have to have the resources and do the job. You need the right cops on the beat to get it done."