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The Case Against Chris Cox

Can a man who played a significant role in the Enron scandal be the best pick to head the SEC? And it's not just Enron...
 
 
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Meet Chris Cox, the man who helped produce the Enron scandal. Orange County Weekly reported that "Cox, as part of conservative Republicans' so-called Contract With America, spearheaded efforts to torpedo protections for corporate investors and shield companies -- like Enron -- and their accountants -- like Arthur Andersen -- from investor lawsuits." Cox's sustained effort to provide protections to corporate bad actors was successful; the nation's economy was not. Moreover, Cox pushed his securities reform bill through Congress at the same time he was a named defendant in two lawsuits for securities fraud. Cox's conduct raises serious questions about his ethical suitability for the job. For the last two-and-half years, outgoing SEC Chairman William Donaldson has worked to repair the damage Cox helped produce. But Cox remains committed to his ideological agenda, and, should he be confirmed, is ready to take the country back into the Enron era.

Cox's crusade to weaken investor protections

Cox claimed on the floor of the House on 3/7/95 that securities law was "a legal torture chamber ... more suitable to the pages of Charles Dickens' 'Bleak House' than a nation dedicated to equal justice under law." Cox's efforts to weaken protections for investors culminated in the Private Securities Litigation Reform Act of 1995, which provided extensive legal protection to corporate executives, accountants and lawyers who made misleading statements. The bill was enacted into law over President Clinton's veto " after heavy lobbying from Andersen [and] the rest of the accounting industry." Duke University Law Professor James Cox (no relation) called the law " the ultimate in special-interest legislation." Barbara Roper, director of investor protection at the Consumer Federation of America, said Chris Cox's law " made it not only possible but likely that something like Enron would occur."

How the Cox law protects corporate crooks

According to OC Weekly, "[i]ndependent legal analyses and securities lawyers agree" that Cox's bill "significantly raised the bar at several points in the litigation process, making it much harder for plaintiffs to bring lawsuits." Specifically, plaintiffs "would have to prove there was a 'strong inference' that the defendant acted with the required state of mind for fraud. Securities lawyers refer to this requirement as "'scienter' - a mental state embracing intent to deceive, manipulate or defraud." It's an extremely difficult standard to meet. When the standard was interpreted by the 7th Circuit Court of Appeals it "even forgave executives who said they forgot to disclose bad financial news to investors."

How the Cox law protects Kenneth Lay

Cox's law provided additional protections for executives who made inaccurate "forward looking statements" about the future of the company to investors. So when, 12 weeks before the company declared bankruptcy, former Enron CEO Ken Lay told a reporter from Business Week, " We think the company is on solid footing, and we're looking forward to continued strong growth," he was unlikely to face legal consequences.

Cox misrepresents the impact of law

Cox has blatantly misrepresented the impact of the law. For example, according to Cox, his law "requires a company and its officers to constantly update and correct any forward-looking statement once made." The official Congressional Research Service summary of the law, however, "[s]tates that there is no duty upon any person to update a forward-looking statement."

Cox was sued for alleged involvement in Ponzi Scheme

Cox's efforts to limit the ability of investors to sue for fraud was informed by his personal experience. Cox worked for the law firm of Latham & Watkins from 1978 to 1986 before leaving to join the White House counsel's office. On 9/17/94, the LA Times reported, Cox was sued for his work at Latham that involved him in a business scheme that robbed nearly 8,000 investors of approximately $136 million. The scheme cheated customers out of their retirement nest eggs by enticing them to invest in phony mortgages. High-level officers at First Pension Corporation, the company at issue, pled guilty to fraudulently diverting funds. 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 in the case, but information uncovered later revealed him to be more involved with the convicted dealer than he previously let on.

Details murky on resolution of class action lawsuit against Cox

Two suits were filed against Cox: a class action by the investors of First Pension Corp. and another by the court-appointed receiver. On 6/15/96, the LA Times wrote that although Cox was dropped as a defendant from the receiver's case (a move that was meant to "streamline the case," according to the receiver), Cox remained a defendant in the class action. The other major defendant, the accounting giant Coopers & Lybrand (now PricewaterhouseCoopers) was found guilty in July 2000 by a California Superior Court jury, according to the LA Times, for having "misrepresented First Pension's condition, concealed material information and abetted the company's managers in the fraud." In August 2000, the LA Times reported that the class action was settled before the damages phase could be entered into, but "terms of the agreement were not disclosed."

Conflict: Cox sought to pass Class Action Reform Bill while named in class action suit

Cox was named in a class-action suit brought by the defrauded investors of First Pension. At the same time he was named in the suit, Cox was holding hearings on the Hill on the Private Securities Litigation Reform Act, a bill that, according to the WSJ, would "sharply limit the circumstances in which investors could bring class-action lawsuits." The AP noted, "Cox was informed one week before the bill was introduced that attorneys were threatening to add him as a defendant in a securities lawsuit." Although the bill did not directly affect the case against him because the case was filed in state court, the AP noted, "it could affect future legal actions brought in federal court against him or his former law firm, Latham & Watkins, which is named as a defendant in the suit." Despite there being an obvious conflict of interest involved with Cox's legislation, the House took no action against him.

Conflict: Cox amended the legislation after learning of his own liability

Though Cox claimed he only performed a small amount of legal work for one of the convicted securities dealers, the AP uncovered documents that showed Cox had actually worked with the felon in another major transaction. When confronted with the new evidence of the relationship, Cox said, "I don't have any independent recollection of that work." Back on Capitol Hill, Cox added an additional protection for targets of securities fraud lawsuits. "The day after the AP questioned Cox about [the relationship between him and the convicted dealer,] the congressman amended his legislation to prevent lawyers and others from being sued if they 'genuinely forgot to disclose' important information."

Cox's questionable campaign contributions

Throughout his career in Congress, Cox has received more than $254,000 from the securities and investment industry, the fourth-largest industry contributor to Cox. He received another $206,000 from the accounting industry. Taken together, the securities and accounting industries combine to form the largest industry contributor to Cox. Cox's single largest contributor is the law firm of Latham & Watkins, the former employer that both involved him and absolved him of his personal legal troubles. Cox received $2,000 from William Cooper, owner of First Pension, but was forced to return the funds as controversy surrounding Cox's involvement in the scandal grew. Cox received a campaign contribution from ethically challenged lobbyist Jack Abramoff in 1996. He also received $2,000 from an Andersen Accounting executive in the 2001-02 cycle.