NEW YORK (CNN/Money) - The Securities and Exchange Commission launched an investigation Thursday into the controversial selection of William Webster to head a new accounting oversight board after it was revealed that Chairman Harvey Pitt hid crucial information about Webster from other members of the SEC.

While Pitt himself made the initial call for the investigation into Webster's appointment, the news is yet another black eye for the SEC chairman, who has been charged by critics with being in the pocket of the accounting industry.

Leading Democrats renewed their calls for Pitt to resign, and Sen. Paul Sarbanes of Maryland, author of the sweeping corporate reform legislation that created the accounting board, said he plans to hold congressional hearings on the matter.

Webster, the former director of the Federal Bureau of Investigation and the CIA, was elected last Friday to head the SEC's new accounting oversight board in a divisive vote by SEC commissioners that was split along party lines.

William Webster

Webster had warned Pitt before the vote that he had recently headed the audit committee of a small publicly traded company, U.S. Technologies, based in Washington, D.C., that is facing allegations of fraud, according to a person familiar with Webster's discussions with Pitt.

Pitt supported Webster's appointment, but -- according to a New York Times report Thursday -- didn't tell the other SEC commissioners what Webster had told him.

SEC spokeswoman Christi Harlan said the agency's inspector general would conduct an investigation. "It's the normal route for internal inquiries," she said. "This is simply a look at the process and it is not a review of Judge Webster."

The White House said it supported Webster's appointment and continues to stand behind Pitt, although spokesman Scott McClellan admitted that the administration did not "know the facts."

"William Webster has a long, distinguished career and is highly respected by Democrats and Republicans alike," McClellan said. Asked if the White House still had faith in Harvey Pitt, McClellan said, "Yes." He said the White House was notified of the controversy when they were called by the Times, which first reported the story.

Democrats responded by once again calling for Pitt to step down as chairman of the nation's top watchdog of the securities industry.

"His continued missteps are further damaging investor confidence at a time when the U.S. economy is weak and consumer confidence is at the lowest point in years," Sen. Carl Levin, D-Mich., said in a statement.

Sarbanes, who co-authored the Sarbanes-Oxley Act, said he was "deeply concerned" that the appointment of the head of the accounting board "has gotten so off track" and, referring to Pitt, added, "The public has lost confidence in the chairman."

He said he planned to have lawmakers "examine this matter" when Congress reconvenes.

Appearing later on Lou Dobbs Moneyline, Sarbanes said, "The real issue was Harvey Pitt's failure to tell the other commissioners" about Webster's situation. "Pitt then never passed on the information to the other commissioners."

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Some critics also said Webster should step down.

"The shocking revelation that Mr. Webster headed the audit committee of a public company, U.S. Technologies, with accounting problems that he failed to fully investigate means that he must resign immediately,'' said Nancy M. Smith, former Director of the SEC's Office of Investor Education and Assistance and Director of RestoreTheTrust.com.

"Investors were looking to President Bush to throw them a life-raft in a sea of accounting fraud and abuse. Instead, the president threw them a pair of cement shoes," she said, adding Pitt should also step down.

Pitt, a Republican and an appointee of President Bush, has been under intense criticism from Democrats for his resistance earlier this year to sweeping changes in corporate accounting. Critics worry that his previous employment by the very accounting industry he's now in charge of regulating created a conflict of interest that would lead him to favor corporate concerns over investors' interests.

Democrats also are sure to use the latest SEC fiasco against Republicans in next Tuesday's general election, in which control of both houses of Congress are at stake.

"Mr. Pitt is not behaving in a trustworthy manner that will bring credibility back to the market and restore investor confidence, and I again urge President Bush to ask Harvey Pitt to step aside from his post today," House Minority Leader Richard Gephardt, D-Mo., said in a statement.

"If Republicans in the House don't call for getting rid of [Pitt] before the election, we know now what their agenda will be after the election," he said.

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Corporate accounting reform became a hot topic this year after scandals at Enron, WorldCom, Global Crossing and other companies. Eventually, Congress passed the Sarbanes-Oxley Act of 2002, the most sweeping corporate reform legislation since the Great Depression.

That bill required the SEC, among other things, to set up an independent board to review corporate accounting. Democrats wanted the board to be chaired by John Biggs, a pension fund executive said to be tougher on the accounting business.

White House officials, who have spent a lot of energy defending Pitt this year, told the Times they were not informed about the details of Webster's work for U.S. Technologies.

Webster had headed the three-person auditing committee of U.S. Technologies, which along with its CEO, C. Gregory Earls, are facing suits by investors who say they were defrauded of millions of dollars, the Times said.

Sen. Sarbanes tells why he wants Harvey Pitt to resign over how he handled selection of members for a new accounting oversight board. Play video (QuickTime, Real or Windows Media)

The suits allege the misconduct occurred in late 2001 and this year. Before that, the audit committee, led by Webster, had voted to dismiss the outside auditors in the summer of 2001 after those auditors raised concerns about internal financial controls, the Times said.

Webster also told the SEC's chief accountant, Robert Herdman, about his involvement with the company, the report said. "I told them that people are making accusations," Webster said of his conversation with Pitt, the newspaper said. "I said if this is a problem, then maybe we shouldn't go forward. I raised it because I didn't want it to become an issue."

Webster, who left U.S. Technologies' board in July, told the Times Pitt had assured him the commission's staff had looked into the issue and it would not pose a problem, the report said.  

-- from staff and wire reports