The Cox guarding the henhouse

If Rep. Chris Cox is confirmed as chairman of the SEC, corporate wrongdoers in the Bernie Ebbers mold will be able to rest easier.

By Judd Legum

Jul 16, 2005 | When President Bush announced Rep. Chris Cox, R-Calif., as his nominee to chair the Securities and Exchange Commission last month, he said Cox would work to "guarantee honesty and transparency in our markets and corporate boardrooms." It was an odd choice of words, considering that Cox's signature achievement during his 17 years in Congress is the enactment of a law, the Private Securities Litigation Reform Act of 1995, that by all accounts has made it more difficult for corporate executives who lie to investors to be held responsible for their actions. According to experts, this law played a significant role in bringing about the spate of fraud cases at WorldCom, Enron and numerous other corporations in recent years.

Although Senate hearings have not yet been held on Cox's nomination, corporations are already anticipating the changes he would be likely to make in their favor, considering his pro-corporate stance in the past. Corporate lobbyists are "almost giddy at the prospect of Cox" being put in charge of market regulation as SEC chairman, Business Week recently reported. If confirmed, Cox would be in a position not only to dial back enforcement of investor-friendly laws like the Sarbanes-Oxley Act of 2002 but also put the brakes on initiatives set into motion by former SEC chairman William Donaldson (who stepped down June 30), such as requiring corporations to treat stock options as an expense and mutual fund companies to have independent board members.

Co-sponsored by Cox and Sen. Chris Dodd, D-Conn., the Private Securities Litigation Reform Act was a central plank of the Republicans' "Contract With America," and was ostensibly aimed at discouraging frivolous lawsuits by investors. But the law provides considerable legal protections for corporate executives -- and, just as important, their accountants and lawyers -- who mislead investors. For example, the law provides a "safe harbor" for executives who make inaccurate "forward-looking statements" about their company's future prospects. Securities lawyers refer to this provision as "the license to lie."

Under the PSLRA (which became law over President Clinton's veto), before a court can even accept a corporate fraud case, investors must prove there is a "strong inference" that the corporate defendant acted with the specific intent to "deceive, manipulate or defraud." This is a very tough standard to meet. The 7th Circuit Court of Appeals, interpreting the PSLRA, dismissed fraud cases against corporate executives who said they simply forgot to disclose damaging information to investors. (Cox favored an even more severe version of the law that would have shielded corporations from lawsuits in nearly every circumstance.)

But describing Cox as a principal author of the bill doesn't do justice to his significant role in its enactment. Cox was a PSLRA evangelist, and he sought to demonize his opposition. During a congressional hearing on the bill on Jan. 19, 1995, Cox described lawsuits by investors for securities fraud as "a scandal of corruption on a scale Congress hasn't witnessed since the days of Eliot Ness and Al Capone." These lawsuits, in Cox's view, were nothing more than an "extortion racket."

One of the witnesses at the hearing, echoing Cox's theme, claimed he was "intimidated and threatened" by Rep. Ed Markey, D-Mass., and securities lawyer Bill Lerach (who also testified) for agreeing to appear at the hearing. The witness, AES Corp. president Dennis Bakke, later admitted under questioning by former Rep. Jack Fields, R-Texas, that no one had threatened him; he apologized and said he was referring to advisors who warned him about retribution. Cox was undeterred. When it was his turn to question Bakke, he said, "You pass on to those advisors, whoever they were, that they weren't altogether wrong."

Lerach, whom Cox described as earning his living through "legalized extortion," turned out to be particularly prescient about the impact of the law. In his opening statement at the hearing, Lerach said that if the PSLRA was enacted, "in 10 or 15 years you will be holding another hearing with the debacle in the securities market that will make you remember the [savings and loan] mess with fondness -- because the fraudsters and the dishonest people are there, and if the prohibitions against fraud are removed, they will come forward [and] they will become more active."

Next Page: Corporate fraud wreaked havoc on the nation's economy just five years later

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