Risk & Compliance

SEC’s Cox Tells Congress: Let the Decision Stand

The chairman explains why the commission voted with the plaintiffs in a case seeking to find "secondary actors" liable.
Sarah JohnsonJune 27, 2007

Making a strong case for rule by precedent, Securities and Exchange Commission Chairman Christopher Cox told the House Financial Services Committee that SEC interpretations of laws shouldn’t depend on who’s in charge at any one time. In their vote in favor of a shareholder brief arguing that “secondary actors” can be sued for another company’s securities-law violations, the commissioners were being faithful to their predecessors’ opinions, he testified on Tuesday.

Cox’s vote was part of the majority in a 3-2 SEC vote in the so-called StoneRidge case. “It is my view that precedent matters,” he said during a House Financial Services Committee hearing at which all five commissioners attended. “The SEC rules and policies should not be so effervescent as to change with one or two people on board.”

The regulatory process should be transparent and predictable so that people know what to expect from the SEC, according to Cox. “The law has to have some objectivity, as in it can’t be a question of how we all feel [about] it,” he said.

To be sure, two of the commissioners, Kathleen Casey and Paul Atkins, voted against their predecessors as well as their peers in StoneRidge v. Scientific-Atlanta, asking that the SEC not file an opinion in the Supreme Court case. In the current case, the plaintiffs contend that the vendors of Charter Communications should be held equally responsible for an alleged sham transaction. Atkins and Casey dissented on the grounds that they believe the SEC’s test for “scheme liability” proposed unanimously in a similar case was too vague.

In the prior case referred to by Cox in his testimony, the shareholders of Homestore.com had sued the real-estate website’s business partners, saying their financial transactions had contributed to a fraudulent scheme hatched by Homestore. In 2004 — a year before Cox joined the commission — the SEC weighed in favor of a broad definition of liability for companies indirectly involved in violations of the securities laws.

The 2004 commissioners had voted unanimously to give the following test for determining whether shareholders have the right to sue a company’s business partner: “Any person who directly or indirectly engages in a manipulative or deceptive act as part of a scheme to defraud can be a primary violator … any person who provides assistance to other participants in a scheme but does not himself engage in a manipulative or deceptive act can only be an aider and abettor.”

In the end, the current commission’s divided vote for filing an amicus brief in favor of Charter’s shareholders hasn’t had an effect beyond irritating the Republicans on the House committee who fear the SEC’s view on the case could lead to frivolous lawsuits. The opinion did not make its way to the Supreme Court by the June 11 deadline for filing amicus briefs on behalf of the plaintiffs.

4 Powerful Communication Strategies for Your Next Board Meeting