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Thursday, May 31, 2007

Cox’s True Scheme to be Revealed

It finally will come to a hilt. Christopher Cox, Chairman of the SEC, has to make a decision. Is he a friend to big business and corporate interest as his record in the U.S. Congress has shown, or is he a champion of the individual investor as he claimed in his Senate confirmation hearings? We shall see well enough as he must decide whether to file an amicus brief with the Supreme Court weighing in on whether the SEC advocates so-called “scheme liability.” Scheme liability means that after a major corporate fraud is uncovered, other players who may have participated in the fraud share in the liability and may be sued under SEC Rule 10b-5.

The stakes cannot be higher. There are still many victims of dot-com-era fraud who haven’t been able to recoup their losses because the Enron’s of the world are no longer liquid. The liquidity exists with the vendors including the brokerage houses that assisted in hiding transactions, law firms that advised fraudulent deals to hide losses and accountants that swept substantial profit shortfalls under the carpet. In many cases the fraud that brought down Enron, HealthSouth, and WorldCom was the brainchild of a consultant, or at the very least was blessed by outside vendors who charged fat fees for their rubber stamps.

Chairman Cox is no fan of class action law suits and was a champion of tort reform while in Congress, which makes his decision hard to predict. Ever the optimist, I have to believe he’ll keep his promise to investors and ask the court to establish a precedent that broadens the liability to the Wall Street fraudsters that should have gone the way of Jeffrey Skilling and Bernie Ebbers in the first place. It is indeed a defining moment.


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