Meet SEC Chairman Christopher Cox

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Floyd Norris
A Lesson in Fraud for Chris Cox



Published: July 29, 2005
THE lawyer solemnly told regulators it would be far too costly for a mutual fund to seek appraisals of its assets, and no appraisals were made. When employees of the investment firm suspected something was amiss, they were reassured when a government auditor pored over the books and concluded that all was well.

And so the fraud continued for more than a decade. It later turned out that the assets sold to investors were largely fictitious, and that the supposed auditor, who presented credentials showing she worked for the California Department of Corporations, was in reality an actress hired by the man running the fraud.

The lawyer who argued that it would be a waste of money to require appraisals is about to be inundated with appeals to reduce the cost of regulation. That lawyer was Christopher Cox, who is likely to be confirmed today as chairman of the Securities and Exchange Commission. Mr. Cox did not know he was representing a crook at the time he wrote the letter. It was years later that William Edward Cooper, whose investment firm Mr. Cox was representing, pleaded guilty and was sentenced to 10 years in prison.

At his confirmation hearing this week, 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, his former law firm, paid an undisclosed amount to settle the suit.

The public offering on which Mr. Cox worked was not the vehicle for the fraud to which Mr. Cooper pleaded guilty, but that fraud involved the same basic structure - pools of mortgages. The difference was that the pools were sold through private placements, not a public offering.

It was on Feb. 22, 1985, that Mr. Cox sent his letter to regulators at the California Department of Corporations arguing that any appraisal of the value of mortgages in the proposed fund would be subjective and worthless, and that the expenditure of fund assets for an appraisal "would unfairly and unreasonably harm the investors' rate of return."

INSTEAD, Mr. Cox said, regulators and investors should assume that the mortgages were worth their face amount.

Had appraisals been required for the 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.

"There were always red flags, but Cooper was a master at deflecting questions," said Roger Rauch, who worked for Mr. Cooper for six years, including a stretch as president of the company's brokerage subsidiary. "The audit," Mr. Rauch said in a telephone interview this week, "was done to alleviate suspicions, not just mine but those of the salespeople."

The 1990 report by the fake auditor, in reality an actress who spent three weeks apparently reviewing the books, was a masterpiece. It found a few problems but concluded nothing was really wrong. The employees were reassured.

The 1985 letter Mr. Cox sent on behalf of his client also insisted that regulatory standards for the suitability of investments should not apply because the fund was so safe: "Because all of the trust fund loans are secured and over-collateralized, there is relatively low risk," Mr. Cox wrote. It turned out that no investment sold by Mr. Cooper was safe.

As chairman of the S.E.C., Mr. Cox will have to decide whether to seek a weakening of rules stemming from the Sarbanes-Oxley Act that have forced companies to assure their internal controls are adequate. He will hear that the rules are too expensive and are therefore hurting the investors they are supposed to protect.

It is an argument that may sound familiar. And it is one that he now ought to understand may be made on behalf of people who have reasons other than cost to oppose rules meant to deter and expose fraud.

www.nytimes.com/2005/07/29/business/29norris.html?ex=1280289600&en=6430c0e1d6212003&ei=5088&partner=rssnyt&emc=rss

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July 25, 2005

Rep. Christopher Cox’s Anti-Investor Record Disqualifies Him From Serving as SEC Chair

Public Citizen Releases Report Analyzing Cox’s Voting Record and Sponsored Legislation

WASHINGTON, D.C. – U.S. Rep. Christopher Cox (R-Calif.), who has been nominated to chair the Securities and Exchange Commission (SEC), is a defender of corporate interests whose legislative record indicates he would not protect investors if he were confirmed.

During his nine terms as a member of the U.S. House of Representatives, Cox has led efforts to make it harder for investors to seek redress for fraud and has not been an advocate for the independence of the very agency he would now lead, according to a report Public Citizen released today. Cox’s securities-related voting record is strongly anti-investor. On major legislation addressing corporate and accounting reform, investor legal rights and protection of retirement investments, Cox cast only one vote of 22 – 4.5 percent – in support of investors.

The report, Rep. Christopher Cox: His Anti-Investor Record Should Disqualify Him From Leading the SEC, is available here. Public Citizen released the report during a telephone press conference with labor representatives and investor advocates who questioned Cox’s fitness to serve as SEC chairman.

Cox’s nomination hearing before the Senate Committee on Banking, Housing and Urban Affairs is scheduled for Tuesday, July 26.

The SEC chairmanship is a particularly critical position given that half of U.S. households now own stock and that traditional pension plans have given way to 401(k) plans, heightening the importance of securities investments. While brokers, the stock exchanges and investment bankers have their own well-financed representatives, the main protector of investor interests is the SEC. Cox’s record, however, shows that he consistently values corporate interests over investor concerns.

“The United States cannot afford to have an SEC chairman who doesn’t put investors first,” said Public Citizen President Joan Claybrook. “Given the recent corporate crime wave and the enormous financial losses that so many Americans have sustained because of corporate misdeeds, it is essential that the SEC be headed by someone who will look out for the average investor.”

Public Citizen analyzed both Cox’s voting record and the legislation he has sponsored during his years in the U.S. House of Representatives. The analysis shows that:

On major legislation of interest to investors in recent years – the Private Securities Litigation Reform Act, the Sarbanes-Oxley Act and retirement investment protection matters – Cox cast only one vote out of 22 – 4.5 percent – in support of investors.

Although Cox is often cited as having supported the Sarbanes-Oxley corporate reform act of 2002 – the most significant investor protection legislation of the post-Enron era – each of seven committee and floor votes Cox cast on amendments to the bill was against stronger investor protection. Cox also displayed little concern for the bill when it was in committee, missing 7 of 13 committee votes.

Despite having seven chances, Cox did not cast a single pro-investor vote on retirement investment protection bills that moved through the U.S. House of Representatives 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.
Cox has voted to block efforts by the SEC and the Financial Accounting Standards Board to require corporations to expense the value of stock options granted to employees.

Cox is the named sponsor of 178 pieces of legislation, but just four of them – 2.2 percent – have dealt with securities issues. An energetic co-sponsor of legislation, Rep. Cox has lent his name to 1,988 pieces of legislation. Yet only 19 of them – 1 percent – have dealt with securities.

Excluding legislation judged to be neutral, 69 percent of the securities-related legislation Cox has sponsored or co-sponsored has been against investor interests.

Cox’s signature legislative achievement – his sponsorship of the Private Securities Litigation Reform Act of 1995 – made it substantially more difficult for investors to sue to recover losses due to fraud. Moreover, evidence is now emerging indicating that the act, ostensibly aimed at so-called frivolous lawsuits, is having the effect that critics feared: barring meritorious lawsuits in which investors are legitimately entitled to recover damages. The original version of the bill that Cox introduced would have provided even more avenues for companies to dodge liability for fraud.

The other major securities-related bill Cox sponsored sought to interfere with the work of accounting standard-setters and to preserve a method of accounting widely criticized for its potential to be used to mislead investors and allow companies to paper over problems.

“It would be disastrous for investors if Rep. Cox were at the helm of the SEC,” said Claybrook. “His strongly anti-investor track record shows he has little interest in protecting the millions of Americans who are counting on securities investments for their retirement money. The Bush administration needs to select someone else.”

www.citizen.org/pressroom/release.cfm?ID=1997

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Chris Cox’s Continuing Association with Fraud


Sit back and think for a moment about which of your friends you might give $100,000. Which friend would it be and why?

Someone needs to ask Chris Cox why he gave Gary Mendoza $125,000 (including a $100,000 personal check!) for the latter’s 2002 campaign for California insurance commissioner. Mendoza never paid a dime back. What ’s going on here? Only Chris Cox can answer that question.

Chris Cox’s interview with Dan Tsang on KUCI is interesting for several reasons. Particularly, the last 15 minutes are pertinent to the Cox/Mendoza/1st Pension/Securities Litigation Reform Act nexus of issues. (To listen click on falco.kuci.uci.edu/~dtsang/subversity/thisweek.htm, scroll down to October 29, 2002, then click on the loud-speaker icon, then you can fast forward to the 45th minute.)

1. You will notice by listening to the entire interview that Mr. Cox has an excellent command of detail when he wants to – about China, tobacco issues, etc.

2. As to the $125,000 he’s given his good friend, Gary Mendoza – it’s just that, a gift to a good friend. In fact, he is Mendoza’s single biggest contributor. Mendoza spent the money in losing the 2002 campaign and closed his campaign accounts without paying Mr. Cox back. But, according to Mr. Cox, there is apparently no influence attached to his extraordinary six-figure donation?

3. Indeed, he has lots of good stuff to say about Mendoza including my favorite: “Truth is that it is a case that never even got so far as a hearing or trial. It wasn’t settled. It was just thrown out with respect to Gary Mendoza and yours truly as well.”

4. Articles in the LA Times tell another story – please see (1) Richard Keil (2/24/95); John O’Dell and James Granelli (6/16/95, 6/15/96) and Greg Hernandez (7/29/00). Either Cox is lying or the Times has the story wrong? That is, Cox was dismissed from the suit after long consideration and the law firm and Mendoza settled for an undisclosed amount.

5. Cox’s strategic memory lapses are consistent with comments in the Keil article and it’s influence on Cox’s composition of the Securities Litigation Reform Act.

6. Finally, you will hear Mr. Cox dismissing (disparaging if you consider his tone of voice) Lisa Girion’s July 21, 2002 article.

Chris Cox and Gary Mendoza Avoid Questions About First Pension Scandal

Congressman’s Contribution to Republican Candidate Raises More Concerns

IRVINE – Why does Congressman Christopher Cox owe Gary Mendoza $125,000? That’s how much Mr. Cox has contributed to the campaign coffers of Republican Insurance Commissioner Candidate Gary Mendoza. The last time the pair worked together they ended up being sued for fraud. As lawyers, Cox and Mendoza represented William E. Cooper, the architect of a Ponzi scheme perpetrated by First Pension Corporation, an Irvine retirement firm that managed the savings of over 8,000 mostly elderly Southern Californians. Through aggressive radio advertisements promising high yields, First Pension recruited clients to invest in home loan mortgages. The mortgages, however, never existed and Cooper and his cronies accrued some $136 million in ill-gotten gains before being discovered.

“$125,000 is an unusually large contribution for a federal candidate to be making to a state campaign, particularly when the federal races are so tight this year. I think the public should know exactly what Chris Cox and Gary Mendoza are up to,” said Professor John Graham, who is running against Cox in the 48th Congressional District election. “Voters in Orange County deserve representation that is not tainted by shady backroom deals and associations with perpetrators of a major frauds.”

Mendoza and Cox were named in a class action suit for aiding and abetting the First Pension fraud. Mendoza ponied up to settle the major litigation accusing him of helping the crook to rearrange a corporate structure to change how the operation looked on paper and to trick the SEC, and other regulators into allowing the Ponzi scheme to continue. Mendoza refuses to this day to disclose the amount of the settlement. Although Cox was dropped from the suit, he was later forced by the bilked investors to return to them the thousands of dollars in campaign contributions given him by Cooper.

While Cox was fighting the lawsuit regarding First Pension in the state courts he was also fighting very hard to limit shareholders rights on Capitol Hill. Indeed, he authored the bill that has allowed his cronies and donors to pillage pension and savings accounts nationwide. His Private Securities Litigation Reform Act was passed in December of 1995 over President Clinton’s veto. The law made it much more difficult for shareholders to sue executives for fraud, thus opening the flood gates for the corporate misbehavior only now being revealed today. The Los Angeles Times recently headlined a story on the bill: “Crisis in Corporate America, 1995 Tort Reform Act Said to Provide Safe Harbor for Fraud,” (July 21, 2002).

That bill was aggressively lobbied for by accounting firm Arthur Andersen. Indeed, Andersen, Merrill Lynch (remember the Orange County bankruptcy), and WorldCom executives have all donated thousands of dollars to Mr. Cox’s campaign, and have also recently taken the 5th Amendment on Capitol Hill. Of course, William E. Cooper another of Cox’s donors was convicted of fraud and is now serving a ten-year term in state prison.

At the time Cox was asked about his work for Cooper – he initially reported working on just one real estate mutual fund offering. However, documents obtained by the Associated Press also showed that Cox had represented Cooper during an attempt to purchase a bank in Northern California. In a subsequent interview, Cox couldn’t remember working on the bank deal. The LA Times (2-24-95) reported that the day after he “forgot” this information, “…the congressman amended his legislation [that is, the Litigation Reform Act] to prevent lawyers and others from being sued if they ‘genuinely forgot to disclose’ important information.” One has to wonder how many times the “Cox excuse” will be used by Enron and WorldCom con men during their trials in the coming months.

The consequences of Christopher Cox’s past actions have been devastating to Americans’ retirement accounts. He and Gary Mendoza were law firm partners working together for one of the most notorious perpetrators of fraud in California history. Given Mr. Cox’s six-figure donation to Mr. Mendoza’s current campaign, one has to wonder what’s being cooked up now?

Chronology of Cox and 1st Pension1983 “fraud began at 1st Pension,” according to William E. Cooper

1984-85: Cox works on two separate cases for 1st Pension

1986: Cox goes to White House

1988, 1990: Cox accepts donations from Cooper [Cooper also donates some $44,000 to Bush Sr., Wilson, Deukmajian]

1990: Deukmajian appoints Francisco Firmat to Superior Court

1994: April 1st Pension scandal breaks, declares bankruptcy
September Cooper is convicted, Cox implicated in scandal

1995: February Associated Press links Cox to Cooper*
March Cox introduces Securities Litigation Reform Act in House
September Cox returns Cooper’s donations AFTER they are publicly demanded by bilked investors, so does Wilson who also has political ambitions December Clinton’s veto of Securities Litigation Reform Act overridden

1996: February Firmat** first hears case against Cox and considers for 4 months, including two denials of motions to dismiss (note that Firmat is long term donor to Republican Party)
June Cox’s case finally dismissed by Firmat 2000 July Coopers & Lybrand (1st Pension’s auditor) found liable by a jury
Mendoza and Latham & Watkins had earlier settled with plaintiffs

2002: July 21 LA Times article blames Securities Litigation Reform Act for “providing safe harbor for fraud”

2002: May and September Cox gives Mendoza campaign $125,000 (in the form of donations and loans), this being an extraordinary kind of support provided by Cox for a state candidate

*Cox and Cooper are connected by two different cases on which the former worked for the latter, three separate campaign donations over two years, and a fundraiser for Cox held at Cooper’s Villa Park home. Cooper was also a prominent member of the OC Lincoln Club through which he and Cox would have had numerous opportunities for other interactions.

**One wonders why Judge Firmat did not recuse himself from the Cox case? He had two reasons to do so: (1) William Cooper had donated thousands of dollars to Governor Deukmajian and the Governor had initially appointed him to the bench; (2) Cox was claiming that the plaintiff’s purpose in including him in the suit was Cox’s prominence in the Republican Party – Firmat had been a long-term donor to that party.

Contact: John Graham at 949-856-1969 or [e-mail]

johngraham.us/coxandfraud.html

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