The Regulatory Disaster That Isnt

Cox and the media spin a tale of government red tape that should be killing American companiesbut isnt

If an article could scream, Stephen Moore's 2,800-word piece in a recent American Spectator would have quickly lost its voice. Moore called the Sarbanes-Oxley Act of 2002—take a deep breath—"imbecilic," "intolerable," "hazardous," "onerous," "chilling," a "fearsome weapon," "a perversion," "a new cancer," and "a wealth destruction machine" that "reduces corporate profitability and thus shrinks shareholder wealth," compromises freedom, frightens "top quality" executives from accepting multimillion-dollar annual corporate jobs, empowers unethical prosecutors as well as communist sympathizers, and "criminalizes economic behavior."

Enacted in the wake of a corporate crime spree popularized by the natty thieves at Enron, the federal Sarbanes-Oxley Act helped close loopholes that allowed white-collar crooks to steal billions of dollars and threaten the credibility—nay, the very survival—of the free enterprise system. The reforms demand truthful corporate accounting and disclosure at publicly traded companies. Before Sarbanes, executives could easily claim ignorance of their own fraudulent books; now they must attest that financial records used to encourage investment in their companies aren't cooked or grossly erroneous. Just as important, the law requires audit firms to disclose their interests in the companies they audit.

I enjoy reading the American Spectator largely because of its often humorous writers. But Moore is not joking. He believes his Sarbanes scenario won't be the result of accident or ineptitude. He sees a conspiracy of dunces (from George W. Bush, who signed it, to the Republicans who controlled the House and Senate when Sarbanes was written, debated and passed into law) and wicked politicians ("the anti-capitalistic left" who control nothing). In his mind, the latter group somehow duped the majority by concealing a motive so evil it sounds like Ayn Rand raising J. Edgar Hoover from the grave: "Striking down the productive class in America."

If Moore—who also writes for the Wall Street Journal—is right, our next national crisis won't be dramatized by airborne 18-wheelers or yachts perched on the rooftops of three-story buildings. He imagines (presumably sober) a Nightmare on Wall Street dominated by the distinctive sound of a "vast proliferation" of prosecutors "around the nation slapping handcuffs on America's wealth producers." The national pastime won't be baseball but, he says, "the relentless demonization of the business community."

Be alarmed, but don't panic. Moore believes we can avert this tragedy. The way to thwart "the lusting for the blood of corporate villains" is for a "conservative Republican leader" to emerge and "fix our public policies in this realm," he says. In other words, slay Sarbanes.

But who can corporate executives trust to sabotage the reforms? Who is slick enough to convince the nation that the reforms are sadistic? If Moore is right, who is in the best position to save capitalism?

* * *

At his U.S. Senate confirmation hearing to head the Securities and Exchange Commission (SEC) in late July, Christopher Cox—a longtime friend of Moore's—couldn't stop smiling. The Newport Beach Republican congressman had craved numerous presidential nominations over the years. He'd wanted to become CIA director, federal judge or a high-profile ambassador. He even tried to capture the vice presidential slot in Bob Dole's 1996 campaign for the White House. He unsuccessfully campaigned for speaker of the House of Representatives two times. On at least three occasions, he plotted, but chickened out of, campaigns for the Senate.

So if Cox could win confirmation to the SEC, he'd realize a dream. He told senators that under his direction the agency, which enforces Sarbanes-Oxley, would be "aggressive," "vigilant" and "vigorous." He suggested critics of his nomination were loony for arguing that he'd defang the agency. "Continuity" and "consistency" in the agency's enforcement are critical to the stability of the nation's financial markets, he testified.

Corporate lobbyists who had cheered his nomination remained mum. They knew Cox's protests during the hearings were a necessary counterweight to his legislative record. During nearly 18 years in the House, he'd authored dozens of loopholes for businessmen who would eventually attract the attention of federal prosecutors. For example, in the 1990s Cox tried to kill a law against secret financial pacts between companies and their supposedly independent auditors. He also championed court rules that made it easier for the likes of Charles Keating (who cost taxpayers more than $1 billion) to escape justice. Before Congress, Cox served as legal counsel to one of the biggest swindlers in Southern California history.

Cox didn't laugh when he was sworn into office on Aug. 3. In fact, he maintained the pro-law-enforcement persona for 10 days. He ended the ruse in an Aug. 14 Orange County Register story, "Cox May Relieve Sarbanes-Oxley Pain."

"Smaller firms shouldn't be disadvantaged by higher relative compliance costs," he told the paper. "And, of course, the investor's needs for information aren't necessarily the same for small firms."

It was classic Cox. First, he makes a claim—that compliance costs are unaffordable to small companies—without providing any evidence. Second, he asserts—again, without evidence—that investors want less credible financial reporting from smaller publicly traded firms.

Proof? Cox doesn't offer any, and the Register, his conservative hometown daily, didn't bother to ask. Instead, the paper quoted exclusively from corporate lobbyists and local businessmen, who—like Moore in his American Spectatorpiece—claim Sarbanes reforms are killing the free enterprise system. Venture capitalist Mark Nielsen of Aliso Viejo alleged that compliance costs "can eat up 50 to 100 percent" of a company's net income. David T. Hirschmann of the U.S. Chamber of Commerce asserted that the reforms are so draconian businesses can no longer afford health care, new equipment or marketing campaigns.

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