Stop Chris Cox
President Bush has nominated Rep. Chris Cox (R-CA) to replace William Donaldson as the next SEC Chairman. Rep. Cox's record on issues related to corporate accountability, investor protection and executive compensation make him a bad choice for the job. Congress should block his nomination, which would give extremist ideologues on the right a 3-2 majority among SEC commissioners. The Senate Banking Committee began its nomination hearings on July 25.
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Reasons to Oppose Cox:
He is opposed to corporate accountability. After the collapse of Enron, Cox “rejected the notion that Enron’s meltdown should cause Congress to rethink deregulation.” (Los Angeles Times, 1/22/2002). That's no surprise, since he helped create the Enron scandal to begin with.
Cox has consistently supported the corporate backlash against modest reforms led by the Chamber of Commerce and the Business Roundtable (the club of CEOs). For that reason he opposed the SEC's draft proposal to give investors the right to nominate their own board candidates.
A friend of corporate criminals and corporate lobbyists. As Michael Hiltzik reports in the L.A. Times, Cox was a friend of William Cooper, a convicted felon who defrauded investors of $136 million. While practicing securities law at Latham & Watkins, Cox was named as a defendant in a related lawsuit. The charge against Cox was that he helped write a deceptive plan to sell mutual fund shares. Cox claimed ignorance and said he was only distantly involved, but the Associated Press later uncovered documents that showed him to be more involved with the convicted dealer than he previously let on. Cox wrote a letter that San Diego city attorney Michael Aguirre (who represented defrauded First Pension investors in a related lawsuit) described as "misleading," manipulative," and "false," because it failed to mention that First Pension was already under investigation by the SEC at the time he wrote it.
Cox is also reportedly a close friend of Jack Abramoff, the lobbyist notorious for his close association with Tom Delay (R-TX).
Leader in the legislative fight to gut investor rights to sue for financial fraud. As a primary author of the 1995 Private Securities Litigation Reform Act, the tort law that Columbia Law School Prof. John Coffee says was a key contributing factor in Enron and other frauds, Cox is a leader in the movement to undermine investor rights. That alone should disqualify him for the job. Cox's bill raised the bar at several points in the litigation process, making it much harder for plaintiffs to bring lawsuits.
The PSLRA requires that plaintiffs prove there is a "strong inference" that defendants acted with an intentional state of mind for fraud. Courts have ruled that the plaintiff must demonstrate that the corporate wrongdoer acted with a "reckless disregard" for the truth -- rather than merely negligently. (Ex-Enron CEO Ken Lay has used the "I didn't know" excuse three times already in an attempt to avoid liability for Enron's questionable practices.)
The PSLRA also created a Catch-22 by requiring investors to have specific evidence of alleged wrongdoing before being granted the ability to review a firm's record to obtain such evidence. This provision removed shareholders' ability to investigate their suspcisions. In addition, the PSLRA substituted "proportionate liability" for "joint and several liabilty" -- meaning that even if auditors like Arthur Andersen (Enron's auditor) are found liable for their role in a securities fraud, in most cases they would be held liable for a relatively small proportion of the total judgment, making it so that auditors have little to fear for their complicity.
Aiding “Imperial CEOs” Who Defraud Investors. In 2002, Cox voted against a rule that would require executives to personally certify the accuracy of corporate financial statements, and against giving the SEC the power to strip stock bonuses from executives who falsify statements.
Opposed to Independent Accounting Standards. On June 6, the Washington Post reported: “Mr. Cox has twice sought to subvert the independence of the Financial Accounting Standards Board, which writes the nation's accounting rules. In 2000 he sponsored legislation to postpone the implementation of a rule on accounting for mergers; FASB's chairman, Edmund L. Jenkins, called this "legislative interference with the FASB's ability to do its job." In 2004 Mr. Cox spoke out in favor of a bill that would have blocked a FASB proposal to require employee stock options to be treated as an expense, apparently believing that Congress is better qualified to determine accounting issues than the technical agency that's responsible.” (See “A New SEC Chairman,” Washington Post, June 5, 2005) Although over 800 large corporations have pledged to voluntarily expense stock options, Cox is a friend of high-tech extremists that oppose FASB’s rule, which would merely require companies to stop using accounting gimmickry to hide the true cost of stock options – the infamous “steroids of corporate greed” -- from investors.
Placing retirement security at risk. At a time when President Bush is pushing fpr the privatization of social security -- a major initiative that would invite citizens to convert their retirement security into a stock portfolio subject to the market's volatility and risk, it doesn’t make sense to hand the SEC over to a right-wing ideologue who believes in the kind of aggressive deregulation and gutting of the SEC that clearly led to Enron.
Career funded by the securities industry he is supposed to regulate. Rep. Cox (R-CA) has accepted $254,412 from the securities and investment industry -- the fourth largest industry contributor over the course of his career. As SEC chair, it would be his primary duty to oversee this industry, but that only means he is too close to his career patrons to be trusted to come down hard on corporate crime and other abuses.
...And by corporate lawyers Who oppose highest standards of accountability. Attorneys from Latham & Watkins (where he once worked) were Cox's top contributors during the 2004 campaign. The firm opposed tough provisions in the SEC's new regulatory standards of professional conduct for attorneys, which were required under Section 307 of the Sarbanes-Oxley Act. Although the SEC ultimately issued part of those standards, it stalled over a related "noisy withdrawal" rule in 2003. The "noisy withdrawl" rule would have required attorneys to not only report a material violation "up the ladder" in the corporate governance structure, but also to the SEC itself in the event that managers and directors fail to respond (or resign, and report the resignation to the SEC).
Susan P. Koniak, an expert on standards of professional conduct for attorneys says the rules are already ridiculously convoluted, making them difficult for the SEC to ' enforce. Given Cox's ties to Latham & Watkins, he is unlikely to see a problem in that, and more likely to be sympathetic to corporate attorneys' complaints that the new rule would undermine attorney-client confidentiality. Yet as one American Bar Association group pointed out, corporate lawyers represent the company and its shareholders, not the corporate executives to whom they report. In addition, the ABA voted in 2003 to permit lawyers to break a client's confidence if they believe it necessary to prevent fraud or crime that would cause financial harm. Cox should be asked how he thinks the passive, "see no evil, report no evil" behavior of corporate lawyers at Enron and other companies should be remedied.
To learn how Rep. Chris Cox's (R-CA) voting record repeatedly undermined corporate accountability (a chief responsibility as SEC Chair) check out the the Democrats' report on Cox.
Cut Taxes for Corporations and the Rich For over a decade Cox has led the campaign to cut estate taxes for the super rich, deceptively describing his proposal as a campaign to end the "death tax." In 2001 he voted for billions in tax breaks for overseas corporations. (For more on the issue, check out UFE's Estate Tax backgrounder, fact sheets and Estate Tax Action Center.)
Shill for offshore tax havens. Cox and 21 other members of Congress signed a letter opposing an international effort to crack down on offshore tax havens. The OECD's proposal, supported by the U.S. when it was initiated in 1998, had already been watered down when Cox et al. registered their complaint. For example, a requirement that tax haven countries end “ring fencing” (tax preferences for business entities that do no business domestically in those countries) was dropped.
When the Senate Permanent Subcommittee on Investigations held hearings a few months later to clarify the U.S. government's position on offshore tax havens, President Ford's IRS Commissioner Donald Alexander, suggested that “criticism of the OECD tax haven project [by Cox et al.] ... seems to be based upon extreme libertarian notions founded in anti-government bias.” Subcommittee chair Senator Carl Levin (D-MI) explained that it was in the nation's interest to support the OECD initiative “because many offshore jurisdictions have combined bank and corporate secrecy laws with weak bank regulation and anti-money laundering controls, [and] have become notorious for offshore operations engaged in tax evasion, money laundering, or other crimes.”
SEC investigators are often required to seek offshore account information when enforcing the Foreign Corrupt Practices Act (FCPA), which restricts corporations and their representatives from bribing foreign government officials. The ability of SEC investigators to aggressively enforce the law depends, in part, upon the support and direction they receive from the top. Evidence of lax enforcement in the recent past was revealed in March 2003, when the Senate Finance Committee published a report which revealed that the SEC and the Department of Justice (which shares responsibility for enforcing the FCPA) "failed to act" on "serious allegations" of bribery associated with an Enron power project in Guatemala.
Cox should be asked to explain how he would address these enforcement weaknesses and whether he still believes that “any initiative to inhibit the flow of capital to low-tax countries is contrary to America’s national interests” in a time of rising deficits. Offshore tax havens represent the loss of as much as $70 billion in tax revenues each year.
As the Washington Post’s Steven Pearlstein puts it, “the Cox nomination…signals the return to pliant directors, misleading financial statements, disenfranchised shareholders and runaway executive salaries (“Cox Would make the SEC Corporate America’s Sponsor,” Washington Post, 6/3/05). We agree.
A Cox-led SEC can be expected to continuously coddle corporate criminals and gut investor rights:
* Investors should be concerned about Cox's opposition to a proposal that would allow investors to nominate their own independent candidates for corporate boards. The proposal was postponed by William Donaldson, who suggested it needed to be redrafted.
* Business Week reports that under Cox, SEC fines for corporate crime can be expected to shrink.
* In fact, the SEC’s enforcement budget is already beginning to level off and decline in the wake of the corporate attack on Donaldson and the SEC. Dow Jones reports that on May 19 SEC Executive Director James McConnell sent a memo to each SEC division director informing them that hiring ceilings were being reduced "effective immediately" in anticipation of a lower 2006 budget.
* In his so-called "list of accomplishments", Cox says that "(a)s a member of the Energy Subcommittee, Rep. Cox leads the charge to ensure that the federal government is acting to assist California during its electricity crisis." In fact, he did just the opposite. Rep. Cox has led efforts to weaken the Public Utility Holding Company Act, which the SEC oversees. PUHCA was passed in 1935 to protect consumers and investors against certain abuses committed by the holding companies that then controlled a substantial portion of the country's gas and elecric utilities. Companies like Enron made an aggressive effort to seek ememptions from the Act for certain activities the company was engaged in, either through no-action letters from SEC staff or other means. As one Senate investigation found, had Enron not been allowed to remove itself from PUHCA, it might have had to simplify its structure in a way that exposed much of the market manipulation witnessed in California. That manipulation, which cost ratepayers in Cox's home state of California tens of billions of dollars, demonstrates the need for greater control of the energy companies that sell power, not blind faith in deregulation.
The chairman of the SEC is a particularly powerful person when it comes to setting a direction for corporate accountability, not only because he can reshape the commission by appointing four anti-reform division chiefs (enforcement, market regulation, investment management, and corporate finance), but also because those reforms and all investor rights are protected primarily through specific regulatory policies rather than broadly-defined statutes like Sarbanes-Oxley. These obscure policies are usually passed with little public knowledge or debate.
Therefore, Cox should also be questioned about proposals to weaken corporate accountability, such as the accounting industry's new proposal to cap auditor liability. (See David Reilly and Alessandra Galloni, “Divided Front: Facing Lawsuits, Parmalat Auditor Stresses Its Disunity,” Wall Street Journal, April 28, 2005)
What You Can Do:
Contact Senator Sarbanes and other members of the Senate Banking Committee and tell them to oppose Cox’s nomination. A Cox-led SEC threatens to undermine corporate accountability, roll back the modest reforms passed after Enron, undermine investor confidence and the security of the markets, and even destroy Sarbanes’ own legacy as a reformer.
Use the Act for Change (Working Assets) action alert.
The Growing Opposition to Cox:
Public Citizen (Congress Watch page on Cox).