San Diego It's bad enough to have a fox guarding the henhouse. Having a Cox guard one suggests that the corporate crook will once again be the cock of the walk, crowing as investors get skinned. Some San Diego attorneys have dealt closely with Orange County congressman Christopher Cox and are astounded that late last week, President Bush nominated Cox to be head of the Securities and Exchange Commission.
A decade ago, San Diego attorneys Michael Aguirre, Pat Meyer, and James C. Krause filed a lawsuit citing Cox for making material misrepresentations while he did legal work for Irvine's First Pension Corp. Criminal and civil courts ruled that the company was running a Ponzi scheme that fleeced 8000 largely elderly investors of $136 million. Cox was not a defendant in the suit, but Gary Mendoza, his colleague at Latham & Watkins, who by that time was head of the California Department of Corporations, was a defendant. Neither Cox nor Mendoza was a defendant, as Latham & Watkins accepted the responsibility.
In 1995, First Pension's major manipulator, William E. Cooper, was sentenced to prison for ten years, and two of his confreres went up for lesser stretches.
Cox argued that he was already in Congress by the time the dirty deed was pulled off, but Pat Meyer begs to differ. "Cox was one of the attorneys for First Pension. It was an ongoing fraud for many, many years," she says. "He did leave during the fraud, but he was there during the fraud."
Cox left Latham & Watkins to join the Reagan administration in 1986. When mastermind Cooper was sentenced, the judge noted that the scam had been going on since 1983. Cooper's colleagues put the start date at 1982.
Latham & Watkins settled the civil suit for an undisclosed sum. The accounting firm of PricewaterhouseCoopers also shelled out money for its role in the scheme.
Krause got out of the case not long after it was filed. But, he says, "It's perfectly proper to say [Cox] was corporate counsel for somebody who turned out to be a massive shyster. Whether he should have known that is a triable issue."
Aguirre, who is now city attorney, won't expand beyond what he said a decade ago. The Securities and Exchange Commission is among the agencies investigating San Diego pension machinations. Aguirre and Cox tangled after the suit was filed in 1995. Cox denounced Aguirre and claimed that the so-called silliness of such suits was one reason he sponsored 1995 legislation that emasculated investor protection laws.
"Innuendo is patently misleading and intended to intimidate the sponsor of legislation designed to reform the legal profession," Cox proclaimed after the suit was filed. He had already introduced legislation to put severe limitations on investor lawsuits. It was part of then-House Speaker Newt Gingrich's so-called "Contract with America."
The Wall Street Journal's editorial page joined in the assault, calling Cox a victim of "lawsuit abuse" in an editorial titled "Brazen Beyond Limit?" The Journal said Aguirre had "repeatedly and unsuccessfully run for political office in San Diego as a Democrat." (At the time, he had run twice for city council and once for Congress.) In 1996, the Columbia Journalism Review attacked the Journal's far-right editorial page for numerous inaccuracies, including its account of the Cox/Aguirre flap.
The court-appointed receiver in the First Pension imbroglio also filed suit against Cox, who bitterly denounced that action, too. The suit was later dropped.
Cox's nomination is dismaying because his departing predecessor, William Donaldson, had been chosen in late 2002 to help reassure investors disquieted by burgeoning corporate scandals. Donaldson did his job. He moved toward regulation of hedge funds -- the secret havens where the rich stash their cash. He moved for reform of mutual funds and trading on the major exchanges. He supported heavy corporate fines for wrongdoing, rather than wrist-slaps for individual miscreants. Big business took umbrage. The U.S. Chamber of Commerce sued the securities commission. Donaldson's surprising resignation and Bush's quick naming of Cox suggest that it's back to thievery-as-usual for corporate America.
"It's an about-face," says Meyer. "The last appointment [Donaldson] was made to instill investor confidence. This seems to be the reverse."
Cox's sponsorship of the Private Securities Litigation Reform Act of 1995 helped open the door to Enron, WorldCom, Adelphia, San Diego's Peregrine Systems, ad nauseam, according to many critics. President Clinton vetoed the bill in late 1995, but Congress ultimately overrode the veto. The act did many things: suits had to be filed within a year of a fraud being committed; the statute of limitations was shortened; gathering of documents became more difficult; plaintiffs had to show there is a strong implication that defendants acted with intent to deceive, or "scienter." Judges have a lot of latitude on scienter; they can don blinders and never find it for some billionaire defendant.
When Cox was politicking for the bill, his main target was San Diego class-action attorney Bill Lerach, perhaps the most feared lawyer in America. Cox declared that Lerach-type lawsuits were "legalized piracy on the high seas of the new economy."
According to Fortune magazine, "Lerach decided to lead the fight against the bill himself. It was a big mistake. By making himself so visible, he gave his opponents a very fat target. When Lerach showed up to testify at one subcommittee hearing, Cox likened securities lawyers to Al Capone."
Last week, Lerach told the New York Times that Cox is "virulently anti-investor and unrestrained in his desire to gut the securities laws. It's hard to think of a worse choice for the SEC. This is a world-class payback to the corporate world."
Not all securities plaintiff lawyers agree. "Because of the huge fallout from Enron and WorldCom, judges are sensitized to corporate fraud," says Krause. But Krause is not aware of two recent San Diego rulings. In federal court in late March, Judge Roger T. Benitez couldn't see scienter among Peregrine board members who unloaded hundreds of millions of dollars worth of stock, even though the company lawyer had warned them not to sell because they had inside information about a pending acquisition. They had heard warnings that the accounting firm was uneasy about such practices.