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Cox to Senate: SEC Has the Necessary Resources

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WASHINGTON (–The chairman of the Securities and Exchange Commission appeared before the Senate Banking Committee Tuesday [April 25] for the first time since his confirmation hearing.

The hearing Tuesday bore the unexciting moniker “A Review of Current Securities Issues,” and covered a lot of ground–including the self-regulation of exchanges and the registration of hedge funds.

The chairman of the committee, Sen. Richard Shelby (R-Ala.) asked the witness, SEC Chairman Christopher Cox, about the recent restructuring of the New York Stock Exchange, and how that might affect its self-regulation. Senator Shelby spoke with some evident annoyance about the NYSE’s “unprecedented decision to keep its regulatory unit in-house even after its conversion to a for-profit shareholder-owned entity.”

Chairman Cox replied that “The ground is changing, this is a new world that we’re entering upon.” The SEC, in its recent discussions on this point with the NYSE, has received assurances that they’ll work to strengthen regulatory independence. “We are at the threshold of understanding where this is all going to lead us,” he said.

Sen. Shelby soon turned the questioning over to Sen. Paul S. Sarbanes, (D-Md.) who said he wanted to make “a couple of observations before I put any questions to you.” Sen. Sarbanes then observed that the recent rise of stock market process might encourage some “amnesia” about enforcement problems, and “to make sure that doesn’t happen” he discussed some of the SEC’s most recent enforcement actions, against Bear Stearns, Tyco, and J.P. Morgan Chase & Co.

Sen. Sarbanes then cited an Ernst & Young report on global trends as to initial public offerings. The report observed that issuers and investors perceive capital markets in the United States as the “gold standard” in the matter of corporate governance, but that “some exchanges” abroad “are aggressively marketing the fact that their exchange has lower regulatory requirements than in the U.S.” Sen. Sarbanes said that he believes the United States should continue to be the gold standard rather than competing with those less-exacting folks.

After making those points, Sen. Sarbanes opened the discussion of hedge funds. “The question I want to put to the chairman involves hedge funds and the resources the SEC will need and be devoting to make sure that the investigative and enforcement staffs at the Commission are sufficiently knowledgeable and experienced in the activities of these funds.” He cited an article that appeared recently in the New York Times. The Times’ reporter, Floyd Norris, wrote that markets may be in far worse shape than they appear, and that “we may not learn just how bad it is until something horrible happens. More and more trading and more and more money now falls outside almost all regulation.”

After all that wind-up, the pitch was brief. “Given these concerns … I want to ask the chairman whether the SEC has the necessary resources and authority to understand, investigate activities in this area and if necessary to bring enforcement actions,” the senator said.

Mr. Cox swung sharply after that delivery: “The straightforward answer to the last part of your question is: Yes.” Sen. Sarbanes pursued the matter a bit, stating, “Some of us on this committee lived through the savings and loan debacle,” and know that it’s important to anticipate problem areas.

Senator Chuck Hagel (R-Neb.) pursued the point. “Could you give this committee a status report on where the SEC is on the current regulation even though it is being challenged in federal court, is it still … has there been any change?” To this, too, Mr. Cox had a monosyllabic answer ready: “No.” He said that disregarding the litigation, he has put the rule into effect as it was written. “Over 2,400 investment advisers have registered” as a result, according to the most current data, and those advisers represent more than 11,500 actual funds.

Later in the hearing, Sen. Robert F. Bennett (R-Utah) addressed the issue of naked short selling, and congratulated the SEC staff for their responsiveness to his questions on this subject. “I got into this because I had constituents who had little companies, and for them it is a huge deal. Many of them insist that they’ve been destroyed by it.” He said he doesn’t “know that that’s the case,” but he’s sure that if it’s true, it’s important that the SEC act on it.

Sen. Bennett said that he has sold short “in my investment life. Usually I’ve been burned by it but I’ve done it.” Still, he had to borrow stocks in order to short them and he believes everyone should have to do the same., at the center of a naked-shorts dispute, is, as Sen. Bennett noted, located in Utah.

Responding to Sen. Bennett’s points, Mr. Cox said that “short selling is an important part of healthy markets,” and that on the other hand “it’s vitally important that shares be delivered. These are contracts and they have to be fulfilled. There has to be a rule of law.”

He also said that progress has been made under Regulation SHO, which targets “potentially problematic short selling abuses.” He said that when examinations “that are now ongoing of compliance with Regulation SHO” have been “internalized… I will recommend changes to our rules if those examinations demonstrate that changes are necessary.”

As if to illustrate its vigilance on the day of the hearing, it was also on Tuesday that the SEC announced three new enforcement actions. It announced that on April 11 it had filed a complaint against Garner Anthony, formerly the chief executive of Cox Enterprises, the parent corporation of Cox Communications Inc. The SEC charged that Mr. Anthony traded on inside information, and that on April 13 it settled that complaint with a consent order in federal court in Hawaii. Mr. Anthony neither admitted nor denied the charge, but he did consent to an order that he disgorge $50,900 plus prejudgment interest, and pay a fine also of $50,900.

Also Tuesday, the SEC announced a contested insider trading action against Nelson J. Obus and others in connection with their trading for three hedge funds in advance of the announcement of a merger agreement between SunSource Inc. and Allied Capital Corp., in June 2001.

The SEC filed this complaint in the Manhattan district court, alleging that Mr. Obus directed the purchase of 287,200 shares of SunSource stock in the accounts of the three hedge funds after he was tipped off by c-defendant Peter F. Black. Mr. Black, in turn, had allegedly received the tips from the other co-defendant, Thomas Bradley Strickland.

The three hedge funds involved, according to the complaint, are: Wynnefield Partners Small Cap Value LP, Wynnefield Partners Small Cap Value LP I, and Wynnefield Partners Small Cap Value Offshore Fund Ltd. The SEC alleges that they received illicit gains of $1,335,700 from these trades, and it wants those disgorged. It also wants injunctions and other sanctions. The three funds are named as relief defendants.

Finally Tuesday, the SEC both filed and announced a new complaint against HLI Operating Company Inc., formerly known as Hayes Lemmerz International Inc., Montague, Mich., and four of its former senior officers, in connection with financial fraud that allegedly took place at that company in the years 1999-2001.

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Contact Bob Keane with questions or comments at [email protected].