SEC's street fighter (Christopher Cox)

- Defying expectations, GOP mainstay aggressively has pursued securities fraud -

During more than 16 years in the U.S. House of Representatives, California Republican Christopher Cox was the quintessential conservative.

After a stint as a lawyer in President Reagan's White House, Cox was elected nine times from the Republican stronghold of Orange County, where Richard Nixon was born, the airport is named for John Wayne and no Democrat has won the presidential vote since Franklin Roosevelt. After Republicans took control of the House in the 1994 elections, they chose Cox to lead the party's legislative policy-setting committee.

When President Bush picked Cox, 54, in June 2005 to replace William Donaldson as chairman of the Securities and Exchange Commission, the move set off alarms among investor advocates.

Amid a mutual fund trading scandal and fallout from multibillion-dollar accounting frauds at companies including Enron Corp. and WorldCom Inc., Donaldson had broken ranks with two other Republicans and cast deciding votes on the five-member SEC for stricter regulation of mutual and hedge funds and record-setting penalties for fraud.

Cox, by contrast, was best known to Wall Street and investors for sponsoring a 1995 law that limits shareholder lawsuits blaming stock losses on management malfeasance.

Business groups, eyeing Cox's pedigree, rooted for him to join the SEC's incumbent Republicans. Investor rights activists fretted that he, like Samuel Alito on the Supreme Court, could be the swing vote for a conservative agenda.

"He'd been a Republican Party operative, and the number one concern was that he was going to be soft on business," says Samuel Jones, vice president at Boston-based Trillium Asset Management Corp., which manages $1 billion in mutual funds.

Résumés, it turns out, can be deceiving. Cox, a securities lawyer who holds MBA and law degrees from Harvard University, says he never contemplated overturning existing regulations or going easy on corporate crooks.

"It was maddening," says Cox, who was under instructions to make no public statements before his Senate confirmation hearing. "I might have set a lot of the speculation to rest if only I could have said something."

Cox says no one who knows him well would doubt his commitment to investor protection. In his glass-enclosed office on the 10th floor of the SEC's new headquarters, about six blocks north of the U.S. Capitol, Cox displays a matted and framed check beneath a picture of Samuel Insull, a Chicago utility financier whose investors were wiped out in the Great Depression.

The check, dated Dec. 15, 1944, is made out to Cox's grandfather, C.C. Cox, and represents the payout from the elder Cox's $6,000 investment with Insull, whom Cox calls "the Ken Lay of his day." The check is for $3.36.

More than a year after taking office, Cox has taken no action to unravel the 2002 Sarbanes-Oxley corporate reform law, which set up strict new accounting rules, or any of the new regulations adopted under Donaldson after bitter battles and 3-2 votes by the SEC.

He has won passage of a rule requiring more and clearer disclosures of pay and benefits for top executives.

Under Cox, the SEC has continued to levy stiff fines in some enforcement cases, including a record $800 million penalty in February in an accounting fraud settlement with insurance giant American International Group Inc., which admitted no wrongdoing.

Now, Cox is the chief enforcer in a scandal whose size no one anticipated at the time he was nominated: options backdating. When he took his oath office in August 2005, SEC investigators were looking into allegations that a handful of companies had altered the terms of their executives' option grants to boost their potential value.

Since then, dozens of companies have been ensnared in the backdating net, suspected of misleading shareholders and regulators about the cost of multimillion-dollar executive pay packages.

So far, Cox has talked tough, promising vigorous action if companies or their executives intentionally deceived shareholders. "Options backdating strikes at the heart of investor confidence in our capital markets," Cox said in July, announcing the probe's first case, filed against Gregory Reyes, former chief executive officer of data network equipment maker Brocade Communications Systems Inc., who has pleaded not guilty.

"The full weight of the federal government is being put behind this effort to stamp out fraudulent stock option backdating," he said.

The SEC is investigating option grants at more than 100 companies, including such familiar names as Barnes & Noble Inc., Cablevision Systems Corp., Home Depot Inc. and UnitedHealth Group Inc. As of early October, the SEC had filed civil fraud suits against former executives at Brocade and Comverse Technology Inc., a New York-based voice mail software maker. In both cases, the agency coordinated with the Justice Department, which brought criminal charges.

Cox's pledges to hunt down those guilty of backdating fraud have eased questions about his commitment to strong enforcement, says Ann Yerger, executive director of the Washington-based Council of Institutional Investors, which represents pension and investment funds with more than $3 trillion in assets.

"He's been very outspoken in opposing backdating and ensuring there have been robust investigations," she says.

Dozens of companies have launched their own reviews of option grants. More than 40 officials have resigned or been fired as a result of backdating reviews. The most prominent was William McGuire, CEO of UnitedHealth, the biggest U.S. health insurer, who stepped down on Oct. 15 along with the company's general counsel and the head of the board of directors' compensation committee.

Altogether, more than 160 companies have disclosed SEC, Justice Department or internal inquiries. Though potential backdating problems span industries and regions, about half of those companies are based in Cox's home state of California, where generous option grants are part of Silicon Valley's business culture. "We have many investigations under way," Cox says. "The story is going to be told by the cases the agency chooses to bring."

Typical stock option grants give employees or directors the right to purchase shares at that day's price, over a period of as much as 10 years. If a company's stock rises over time, options reward employees by letting them buy shares at the grant date's lower price.

In backdating options, company officials seek to lock in profits by picking an earlier date when the stock was lower and then falsely reporting that options were granted at that day's price.

Irvine, Calif.-based semiconductor maker Broadcom Corp. said that because an internal options review found backdating of grants from 1998 through 2003, the company will have to redo financial statements to add expenses of at least $1.5 billion — almost four times the company's 2005 net income.

Cox's path to the Reagan White House began in 1976, when he signed on to the ex-movie idol's failed effort to wrest the Republican nomination from Gerald Ford.

"I was part of an extremely small group called Harvard Law Students for Reagan," Cox says. "At our high-water mark, I think there were six of us, and most of us wound up working in the Reagan administration."

In 1978, Cox went to work for Los Angeles-based Latham & Watkins, the biggest law firm on the West Coast, where he rose to partner in 1985. The next year he joined the White House counsel's office.

One of his assignments, which contributed to his reputation later as a conservative ideologue, was helping prepare Robert Bork in his unsuccessful bid for a Supreme Court seat.

As Reagan's presidency wound down in 1988, Cox had a lunchtime chat with Dana Rohrabacher, at the time a White House speechwriter. Talking politics, the two young Californians realized that Republican incumbents from both of their home districts weren't planning to seek re-election.

"We'd been part of the same political combat unit, and we thought, wow, this is our chance to really get into the fight," Rohrabacher says.

Cox won the House seat, and in that and subsequent elections, he never got less than 65 percent of the vote.

Last year, Cox says, Vice President Dick Cheney called him to sound out his interest in leading the SEC. "I gave it 30 seconds' careful consideration and said yes," Cox says.

The SEC had been a battleground under Bush. Former Chairman Harvey Pitt's tenure was marked by controversy over whether he was too close to the accounting industry to enact tough post-Enron rules on auditors. Pitt announced his resignation in November 2002 and left when Donaldson took over three months later.

Donaldson, a Wall Street fixture who co-founded brokerage Donaldson, Lufkin & Jenrette Inc. and was chairman of the New York Stock Exchange from 1990 to 1995, proposed new hedge fund and mutual fund regulations and other measures over securities industry opposition.

Unlike his predecessors, Cox came to the SEC from the political world instead of Wall Street. Long experience in the give-and-take of Capitol Hill negotiations has helped Cox ease tensions, says Massachusetts Rep. Barney Frank, ranking Democrat on the House Financial Services Committee, which oversees the SEC.

"He's done a very good job of holding the commission together and minimizing dissent, which is something you learn in Congress," Frank says. "He has been very careful to make a smooth transition. Sharp jolts are not good for regulatory agencies."

The agency hasn't been immune from controversy. In October the Government Accountability Office, Congress' investigative arm, said it had started a broad review of SEC enforcement policies and practices in response to allegations by former SEC investigator Gary Aguirre.

The inquiry, launched at the urging of Sen. Charles Grassley, R-Iowa, the current chairman of the Senate Finance Committee, will look into charges by Aguirre that his superiors refused to allow him to interview John Mack, former CEO of Credit Suisse First Boston and now head of Morgan Stanley, concerning charges of insider trading at hedge fund Pequot Capital Management.

Aguirre was fired in September 2005, shortly after Cox arrived at the SEC. Earlier this year, the SEC went ahead and interviewed Mack on the question of whether he passed inside information to Pequot. The SEC has since closed the investigation and said no action will be taken. Cox said he welcomed the GAO review.

For the moment, the SEC is busy with the options backdating probes. Cox cautions that not every investigation will wind up in court. There may be no legal problem with granting options at a lower price from an earlier date, he says, if a company's stock option plan permits it, if a grant is properly disclosed to investors and if the transaction is treated correctly for accounting and tax purposes.

Decisions about whether specific grants are improper, and what laws might have been broken, depend on the particulars of each case, Cox says.

Bush had nominated Cox to be on the U.S. 9th. Circuit Court of Appeals, but the state's two Senators (both San Fransisco moonbats) torpedoed it.

Maybe in the future...

Yeah...he's brilliant....charismatic and articulate. ...he belongs in a more public position...head of RNC...Supreme court nominee..or a VP slot for Romney or Rudy.

Wall Street and Corruption are symbiotic, one feeds on the other at a rate that depends on the level of SEC enforcement.

SEC badly needs a crusader now because more and more Americans are relying on their 401k's for retirement.

Here's the problem that awaits present and future retirees:

http://www.businessjive.com/nss/darkside.html

If you do nothing else this week, set aside an hour or two to read and study the slideshow in the above link. It is a scandal that dwarfs a combined Enron, Worldcom and so many other scandals.

Here are some eassier reading related links:

http://bobosrevenge.blogspot.com/2006/01/dark-side-of-looking-glass-part-two.html

http://bobosrevenge.blogspot.com/2005_11_01_bobosrevenge_archive.html

http://www.cfrn.net/investigates/

More than a year after taking office, Cox has taken no action to unravel the 2002 Sarbanes-Oxley corporate reform law

Sarbanes-Oxley needs to be ripped out by the roots , it is just as convoluted as the tax code and has no real advantages, just forces results to be stated in dozens of different ways and sets up legal traps if you don't follow its dictates to the letter, I call it the full employment program for accountants.

I don't understand why we even need Christopher Cox or even an SEC for that matter. Here, all this time I thought the magic elixer of Eliot Spitzer, the current day self-annointed Elliot Ness was taking care of all the greed and injustice of overt capitalism with it's pall of ever present evil greediness constantly raping the senseless American investors. (/sourchasm)

I did not comment on SOX, I commented on Wall St corruption.

I don't like a choice of either dealing with crooks or bureaucrats. But if I had to I would choose bureaucrats. But my preference would be to have the knowledge that a nasty SEC enforcer is waiting to pounce on any would-be crook.

The tax code is another issue. I support a simplified Fair Tax with abolishment of the income tax, a scaled down IRS and repeal of the 16th Amendment.

I sure wish someone would figure out quickly how to politically torpedo either, or both of our two pathetic US Senators from CA!!!

Year of the woman, my differential!!! (I sure cleaned that up, didn't I?)

"More than a year after taking office, Cox has taken no action to unravel the 2002 Sarbanes-Oxley corporate reform law, which set up strict new accounting rules, or any of the new regulations adopted under Donaldson after bitter battles and 3-2 votes by the SEC."

sarbanes-oxley has caused a host of smaller (small-cap/micro-cap) companies to simply delist/go private to avoid what for them are crippling compliance expenses vs. their total revenues. A couple of times I have seen profitable small-caps simply announce that they are delisting, or are going to try to. I would like to see this law moved to only cover companies with a certain market cap or gross revenues or some other such measurement.

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