Cox Quits at SEC, Leaves Schapiro to Restore Clout After Madoff

By Jesse Westbrook
Bloomberg News
January 21, 2009

Jan. 21 (Bloomberg) -- Christopher Cox stepped down as U.S. Securities and Exchange Commission chairman, leaving behind a demoralized agency that failed to spot Bernard Madoff's alleged fraud and had its role diminished by the collapse of Bear Stearns Cos. and Lehman Brothers Holdings Inc.

His resignation took effect yesterday, agency spokesman John Nester said. During Cox's 3 1/2-year tenure, the SEC has been criticized by lawmakers, investors and its own inspector general as lacking aggressiveness and being deferential to Wall Street banks. President Barack Obama, a Democrat, picked Mary Schapiro, the head of the U.S. brokerage industry's self- regulator, to succeed the Republican Cox.

"I respect Chris Cox, but there's no question that the commission has been much too passive in area after area under his leadership," said Harvey Goldschmid, a former Democratic SEC commissioner who remains in contact with agency employees. "The morale problems and the lack of public regard for the agency must be immediately addressed by Mary Schapiro," said Goldschmid, a law professor at Columbia University in New York.

The agency lost clout in March when the Federal Reserve rescued Bear Stearns and began lending to and examining investment banks regulated by the SEC. Its domain shrank further in September after Lehman declared bankruptcy, Merrill Lynch & Co. sold itself to Bank of America Corp., and Goldman Sachs Group Inc. and Morgan Stanley became Fed-regulated commercial banks.

Lawmakers' Criticism

Another blow came in December when Cox, 56, admitted the SEC missed Madoff's alleged $50 billion Ponzi scheme even though it had received "credible and specific" complaints about the New York-based money manager for at least a decade.

That revelation prompted criticism from Democrats and Republicans at a Jan. 5 meeting of the House Financial Services Committee. Representative Ron Paul, a Texas Republican, questioned whether the SEC should be eliminated altogether.

"He may go down as the unluckiest of the SEC chairmen," said Robert Hillman, who teaches securities law at the University of California, Davis. "He was slow to recognize the deteriorating position of brokerage firms. In that sense, he bears joint responsibility with the secretary of the Treasury and the Federal Reserve chairman."

Republican Kathleen Casey, the most senior member of the commission that oversees the agency, is in line to serve as acting chairman until the Senate confirms Cox's successor, Nester said. Obama could instead ask one of the SEC's two Democratic commissioners, Elisse Walter or Luis Aguilar, to fill the seat temporarily, Nester said.

Donaldson's Legacy

Cox replaced William Donaldson as SEC chairman in August 2005 after representing California's Orange County in the U.S. House of Representatives for 17 years.

Donaldson, a former chairman of the New York Stock Exchange, stepped down after he frustrated fellow Republican commissioners by subjecting companies to multimillion-dollar fines and trying to impose new regulations on mutual funds and hedge funds. He also angered business groups, which complained to President George W. Bush's administration after Donaldson tried to give shareholders more power to pick corporate directors.

Under Cox, who was offered the SEC job by Vice President Dick Cheney, public fights among Democratic and Republican commissioners stopped and enforcement penalties declined.

Unanimous Approvals

SEC commissioners approved unanimously every rule that came before them during Cox's first 22 months as chairman. In fiscal 2008, the agency extracted about $1 billion of fines and illegal profits from companies and individuals after garnering $1.6 billion in 2007. Penalties exceeded $3 billion in each of the three years preceding 2007.

Cox's focus on calming the waters stoked concerns that the SEC had become inactive just as Wall Street's biggest companies were increasing trading in derivatives and complex securities backed by mortgages, Hillman said.

"If you wait until you get consensus, sometimes nothing ever happens," he said. "Especially in a period of financial distress, consensus may not be the best operating procedure."

Cox urged a technology overhaul at the SEC aimed at making corporate profit and revenue statements more useful to investors. He also tried to cut compliance costs stemming from the Sarbanes-Oxley Act after the U.S. Chamber of Commerce, the nation's biggest business lobbying group, said the law's accounting requirements were prompting companies to list shares overseas.

'21st Century' Focus

Cox "came to the commission wanting to focus on bringing the SEC into the 21st century, making the U.S. more globally competitive by getting rid of burdensome regulations and making the agency more technologically sophisticated," said Donald Langevoort, a former SEC attorney who teaches securities regulation at Georgetown University in Washington. "Like so many of his predecessors, that agenda ran up against unprecedented cataclysmic events."

Global stock markets began swooning in August 2007 after banks saddled with illiquid subprime-mortgage securities stopped lending to each other. A year later, with financial companies still facing asset writedowns, Cox banned short-selling of U.S. banks, insurers and securities firms.

A short sale takes place when an investor borrows stock and sells it, aiming to profit by repaying the loan with shares bought at a lower price. The SEC imposed its prohibition after public lobbying by Morgan Stanley Chief Executive Officer John Mack and New York Senators Charles Schumer and Hillary Clinton, Obama's pick to head the U.S. State Department.

Hedge Funds

The Sept. 19 SEC action drew fire from hedge funds, which accused the agency of protecting companies whose shares had plunged because of poor business decisions and over- concentration in mortgage bonds.

Cox, in a Washington Post interview published Dec. 24, said the ban was the biggest mistake of his tenure. He told the Post he made the decision under pressure from Treasury Secretary Henry Paulson and Fed Chairman Ben S. Bernanke. The prohibition lapsed Oct. 8.

Cox also deflected criticism over the SEC's failure in the Madoff investigation. In a Dec. 16 statement issued by the agency, Cox said he was "deeply troubled" that his enforcement staff never sought subpoena power to probe Madoff or brought tips about alleged wrongdoing to the attention of commissioners.

'Shifting Blame'

"It was viewed this time as him shifting blame," said Marc Steinberg, a former SEC enforcement attorney who now teaches law at Southern Methodist University in Dallas. "The staff has some responsibility, but the culture came from the top."

Congress created the SEC in 1934 to restore investor confidence and stem Wall Street abuses blamed for causing the Great Depression. The agency's weakened state means Schapiro, CEO of the Financial Industry Regulatory Authority, will have to fight to make sure the SEC's 75th anniversary isn't its last, said Lynn Turner, a former SEC chief accountant.

"The SEC is in worse shape today than the French army was after its defeat at Waterloo," he said. "Congress may look to some other agency to regulate, which would be to the detriment of investors."

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