Los Angeles Times
In the halls of Congress, Rep. Christopher Cox (R-Newport Beach), who has just been nominated to be the nation’s top securities regulator, stands out for his intelligence.
He reads math books for fun, issues position papers bristling with footnotes and features his two advanced Harvard degrees (“with honors”) in his biography.
When it comes to the work he performed as a lawyer for one of the state’s most notorious con men, however, he pleads ignorance.
Apparently he was unaware that William E. Cooper was a crook or that his company, First Pension Corp., was a fraud. In 1985, when Cox assured state securities regulators that a new Cooper investment scheme would be “low risk” and an absolute boon to small investors trying to save for retirement, he was apparently unaware that the scheme was really designed to hide the losses already incurred by Cooper’s investors and to keep the scam alive. In 1991, when Cooper hosted a fundraiser for Cox at his Villa Park home, Cox thought of him as merely “an upstanding member of the community.”
A few years after that, the fraud finally exposed, Cooper and two partners went to jail.
And now, Cox has been nominated by President Bush as chairman of the Securities and Exchange Commission.
“If his job is to ferret out fraud in the securities markets, then his role in the First Pension case is relevant,” says Michael Aguirre, who represented a few hundred First Pension investors in a 1994 state court lawsuit and is now San Diego city attorney. Latham & Watkins, the law firm that employed Cox, eventually settled investors’ claims against it on undisclosed terms.
Cox didn’t respond directly to my questions about First Pension. It appears that the White House stashes its nominees for high office under a cone of silence pending their Senate hearings. But over the years, he has testily denied that he knew anything was awry during the two years he worked with the company. His defenders say his role was confined to helping prepare a preliminary securities offering, and that he left Latham years before the offering became final or the law firm got around to verifying the information it had been given by its client.
His spokesmen point out that Aguirre dropped him as a named defendant in the lawsuit, and suggest that Aguirre couldn’t make a case against him. Aguirre says it was because suing a congressman presents unique difficulties, and that in return for dropping Cox from the case he secured an agreement that Cox’s actions could be imputed to Latham in assessing its legal liability.
Indeed, documents relating to Cox’s work remained in the legal record. The most prominent of these was a letter Cox wrote to California regulators in February 1985. In it he argued that Cooper’s new fund venture would be “fair, just and equitable” to investors and thus wouldn’t require particularly stringent oversight. Aguirre contends that, absent such efforts by Cox and other Latham lawyers, the regulators might have uncovered Cooper’s fraud early on. Instead, the scam continued for nine more years.
It’s proper to recall that First Pension was one of the most flagrant con schemes in Orange Country history, costing thousands of investors ‘ most of them people with small nest eggs ‘ as much as $130 million.
The firm’s main business was selling trust deed investments to the unsophisticated. A trust deed is a subordinate mortgage often taken out by homeowners with poor credit and unprepossessing property. Investors who buy them think they’re acquiring trustworthy securities paying high interest. But let the economy hiccup, and homeowners start falling behind or defaulting on their loans. The investments then plummet in value.
Scams involving trust deeds, which look good on the surface but rot from the inside out, seem to strike California as regularly as El Niño. By the mid-1980s, the rot was spreading at First Pension. So many of its trust deeds were in arrears or default that Cooper and his partners, hoping to conceal the disaster, rolled them into a pool and assigned each of their investors a pro-rata share of the total. The investors kept receiving monthly statements showing gratifying investment gains, but these were largely faked.
Then, apparently to further hide the losses, the operators decided to set up yet another fund and transfer some of the holdings yet again.
As a Latham associate, Cox was assigned to help get this new fund approved by the Department of Corporations, California’s equivalent of the SEC. On Feb. 22, 1985, he wrote the agency a letter replete with statements that Aguirre later characterized in legal papers as “misleading,” “manipulative,” and “false.”
Among other things, Cox suggested that there was no need for the agency to insist on appraisals of the trust deeds, because they would be “secured and over-collateralized.” He added, amazingly, that no one knew how to reliably appraise a trust deed anyway ‘ as though this were an argument in the investments’ favor. As it happens, Latham later undertook such an appraisal itself, only to discover that 73% of its random sampling of deeds from First Pension’s files were questionable.
Cox’s defenders say that his letter didn’t mischaracterize First Pension’s existing business, because he was actually discussing a separate new venture, and only in hypothetical terms. But he also left a few arguably germane facts about his client out of the letter. He didn’t inform the regulators that First Pension was already under investigation by the SEC. He didn’t mention that the year before, the state Department of Real Estate had suspended Cooper’s real estate license in connection with an alleged $577,000 fraud at another company.
Both facts were well known to Latham & Watkins, which suggests either that Cox’s superiors allowed him to make incomplete representations to the state regulators; or that he deliberately stopped his ears against what might be pertinent information about his client; or that he knew and chose, for some reason, to keep mum.
Is Cox’s relationship with First Pension worth exploring? It’s one thing for this history to involve a lowly congressman, but quite another when it concerns a nominee to supreme regulatory authority. That’s especially so given Cox’s signal achievement in the regulatory field, the introduction of a 1995 law that dramatically scaled back investors’ rights to file federal lawsuits alleging securities fraud. It has been hinted that one inspiration for the law was his resentment at Aguirre’s lawsuit.
That law, along with his efforts on First Pension’s behalf and his protestations of innocence and ignorance, raises important questions about Cox’s approach to securities regulation. One hopes these questions will be aired thoroughly when the Senate ponders whether he’s the right man to run the SEC.
They boil down to this: In the never-ending battle between investors and investment promoters, whose side will he be on?
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Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at [email protected] and read his previous columns at latimes.com/hiltzik.
