Democrats support nomination of anti-regulatory advocate to SEC

By Joseph Kay
2 August 2005

Christopher Cox was approved on Friday by a unanimous voice vote in the US Senate to be the new chairman of the Securities and Exchange Commission, the main regulatory agency for Wall Street. Cox, a former Republican Congressman from southern California, received the full support of the Democratic Party in his confirmation hearings.

Bush’s decision in early June to nominate Cox for the post was an indication of the administration’s drive to move the regulatory agency further to the right. It signaled a determination to undercut the very limited reform measures implemented since the wave of accounting scandals that began in late 2001.

In addition to Cox, the Senate approved two Democrats to positions on the five-member commission. Annette Nazareth, a former Wall Street lawyer, was appointed for her first term, and Roel Campos, a Texas businessman and former federal prosecutor, was reappointed. The two remaining seats are both occupied by Republicans.

Cox has a clear pro-business, anti-regulatory record on the issues that will come before him as chairman of the SEC. He is best known for his role in sponsoring a 1995 bill called the Private Securities Litigation Reform Act, which severely limited the ability of investors to sue companies and executives for corporate malfeasance. Cox’s version of the bill, which was even more reactionary than the version eventually enacted into law, would have set an extremely high burden of proof for executive wrongdoing, and would have required investors to pay court fees if they lost their class action cases.

He is on record as an opponent of mandatory expensing of stock options, and many businesses hope that he will help undermine, if not overturn, a rule to this effect recently put in place by the Federal Accounting Standards Board (FASB).

When his nomination was announced, the decision was warmly welcomed by corporate America, with the Wall Street Journal voicing the hope that his selection “marks the end of the era of post-Enron regulatory overkill.” Bush also appointed the outgoing chairman, William Donaldson. However Donaldson was widely regarded as a traitor in Republican circles because he voted with the two Democrats in supporting some regulations and fines for corporations. [See also “Bush picks anti-regulatory hard-liner to head Wall Street oversight board”]

Since Cox’s nomination, several more details about his history have come to light. In the mid-1980s, as he was working in the high-powered corporate and finance law firm of Latham & Watkins, Cox defended a mutual fund company that was later convicted of massive fraud. The company had sold funds for largely fictitious assets and had hired an actress to deliver a false audit report for investors.

Floyd Norris, an economic commentator for the New York Times, noted in a column from July 29 that in 1985 Cox “told regulators it would be far too costly for a mutual fund to seek appraisals of its assets” to determine their actual value. Norris noted that at his confirmation hearing, “Mr. Cox emphasized that he was dismissed as a defendant in the civil suit filed by the receiver for the defrauded funds. He did not point out that Latham & Watkins...paid an undisclosed amount to settle the suit.”

William Cooper, the owner of the mutual fund, was eventually convicted for fraud in relation to a sale different from that which Cox defended. Nevertheless, Norris notes, “Had appraisals been required for mortgage pools Mr. Cooper had already sold, a fraud that began in 1982 might have ended. Instead it continued until 1994. More than $100 million was stolen from people who had sought safe investments for their individual retirement accounts.”

While there is no proof that Cox was privy to the details of Cooper’s fraudulent activity, his role in defending the fund highlights his long history of anti-regulatory advocacy, as well as his close ties to the corporations that he will now be tasked to regulate. The same arguments that Cox used to defend the mutual fund are advanced by all corporations seeking to scale back any government oversight of their operations.

Throughout his legislative career, Cox has maintained close ties with the finance industry, corporate law firms and the accounting giants. All of these have an interest in undercutting government regulation. According to a recent report by the consumer advocacy group Public Citizen, “On major legislation addressing corporate and accounting reform, investor legal rights and protection of retirement investments, Rep. Cox cast only one vote out of 22—4.5 percent—in support of investors” as against corporations.

Further, the group reports, “In seven chances, Rep. Cox did not cast a single pro-investor vote on retirement investment protection bills that moved through the House after employees of a number of companies, including Enron, saw retirement savings wiped out. He voted to ease conflict-of-interest standards for financial advisors; against giving employees a seat on the board of directors of their own retirement plans; and against allowing employees to freely sell company stock held in their retirement plans.”

The fact that Cox has received the full support of the Democrats in the Senate is further proof that on fundamental questions of class interests, the two big business parties are united.

During his confirmation hearings, Cox encountered no hostile questions from Democratic panelists. Dianne Feinstein, the supposed liberal senator from California, upon introducing Cox to the Senate Banking Committee on July 26, declared that he “has the qualifications and experience needed to manage regulation and enforcement and to improve investor confidence in our nation’s securities market.” Cox also was highly praised by New York Democrat Charles Schumer.

Democrats received pledges from Cox that he would not reverse regulations already in place, particularly the stock option expensing requirement. According to a report in the Wall Street Journal, however, “lawmakers didn’t ask Mr. Cox for his views about some of the most controversial rules that resulted in split votes [in the SEC under Donaldson], such as registration of hedge-fund advisers or more board independence at mutual-fund companies.”

For their part, the Democratic appointees to the board emphasized their own opposition to excessive regulation. Nazareth, who has headed the SEC’s market regulation department for five years, declared, “I am keenly aware of the cost of regulation and the importance of balancing these costs with the benefits that regulation seeks to achieve.”

Cox’s confirmation and the universal support he has received also points to the completely fraudulent character of the reforms put in place after the collapse of Enron, WorldCom and many other companies over three years ago. What these scandals revealed was not merely the criminality of a handful of executives, but the utterly rotten state of corporate America as a whole.

The SEC under the Clinton administration played a critical role in facilitating this corruption by turning a blind eye to obvious signs of malfeasance. Enron, for example, would not have been able to perpetuate its schemes for so long if it were not for the OK it received from the SEC to begin its practice of so-called “mark-to-market” accounting.

While a few executives have been prosecuted and some fines have been levied in the name of restoring “investor confidence,” neither political party has any interest in addressing the underlying decay of American business.