Bad news for investors. Bush nominates Chris Cox to replace Donaldson.

[flpoljunkie]

http://www.nytimes.com/2005/06/02/business/02wire-sec.html?ei=5094&en=0e0c99e6c3c91bab&hp=&ex=1117771200&partner=homepage&pagewanted=print

June 2, 2005

Acting Quickly, Bush Nominates Congressman to Lead S.E.C.

By STEPHEN LABATON

WASHINGTON, June 2 - President Bush today nominated a Republican Congressman from California, Christopher Cox, to be chairman of the Securities and Exchange Commission, replacing William H. Donaldson, who announced his resignation on Wednesday.

Mr. Donaldson's resignation, which becomes effective at the end of the month, followed repeated criticism from his two fellow Republican members of the agency and from some business groups and administration officials who contended that his enforcement and policy decisions had been too heavy-handed.

His decision to leave gave President Bush the opportunity to appoint, in Mr. Cox, a successor who is expected to tip the balance at the agency toward the more deregulatory agenda favored by the remaining Republicans on the five-member commission.

<>In the process, Mr. Donaldson often sided with the agency's two Democrats to the consternation of his fellow Republican commissioners, Cynthia A. Glassman and Paul S. Atkins. The agency's rulings provoked a corporate backlash that has become stronger, gaining significant momentum as Republicans have become more powerful in the Senate and as the White House has moved more actively in Mr. Bush's final term to advance a business agenda.

[Cha]

1. I knew this chris cox head

couldn't be good..with the fucking monkey wanting him to appointed.

[quiet.american]

2. They'll have a nice, tall glass of Kool-Aid waiting for him. n/t

[RUMPLEMINTZ]

3. With all due respect

how is this bad for investors? Cox won't affect Google's earnings, Honeywell's price to book value, or Intel's excess inventory. Stocks are bought on expected forward earnings not some schmuck who leads the SEC.

[Singular73]

5. Yeah, thats what the good folks that invested in Enron and Worldbank

said too...duh (with all due respect).

[flpoljunkie]

6. Big business does not like the recently instituted reforms...

reforms which protect investors from greedy corporations and brokerage firms.

More from the article...

During his career in the House, Mr. Cox has pressed the Financial Accounting Standards Board to delay new accounting rules that would eliminate more favorable treatment of some mergers. He has supported efforts to repeal the estate tax, the capital gains tax on savings and investment, and taxes on dividends.

At the S.E.C., the other Republicans on the commission found themselves disagreeing with Mr. Donaldson and the two Democratic commissioners on a variety of significant matters, ranging from whether to regulate hedge funds to overhauling how mutual funds are run to changing the way stocks are traded.

Some of the administration's most important supporters in the corporate world - including the Business Roundtable, an organization of chief executives of the nation's largest companies, and the United States Chamber of Commerce - have complained that the S.E.C. overreacted to recent corporate frauds by imposing rules that have been more burdensome than beneficial.

Those lobbies have been at odds with groups like the Council of Institutional Investors and the Consumer Federation of America, which have supported stronger regulation.

http://www.nytimes.com/2005/06/02/business/02wire-sec.html?ei=5094&en=0e0c99e6c3c91bab&hp=&ex=1117771200&partner=homepage&pagewanted=print

[RUMPLEMINTZ]

8. So tell me how

does making stocks more tax friendly bad for investors?

[flpoljunkie]

10. Making stocks more "tax friendly" for CEO's, insiders, more likely goal.

The SEC under Cox will be working hard to roll back the hard won investor protections. Donaldson himself was disappointed that he was not able to "give shareholders a greater voice in electing corporate directors."

We need more regulation of Wall Street and CEO's--not less. Otherwise, we have learned nothing from the excesses of brokererage firms and the likes of Enron and World Com.

[Justitia]

7. It may have something to do w/this part....

"1995, he was named a defendant in a lawsuit by investors as a result of legal work he did for an investment group in the 1980's. The suit accused Mr. Cox, his former law firm and two former colleagues of misleading regulators and investors about the condition of a real estate investment fund. Mr. Cox, who denied that he had violated any laws, was eventually dropped from the lawsuit and the firm where he worked, Latham & Watkins, settled for an undisclosed amount.

He said his experience as a defendant had helped shape his views about investor lawsuits and led him "to sympathize with people who are victimized in these suits." The bill Mr. Cox helped to write, the Private Securities Litigation Reform Act of 1995, was the only legislation to become law over a veto by President Bill Clinton.

During his career in the House, Mr. Cox has pressed the Financial Accounting Standards Board to delay new accounting rules that would eliminate more favorable treatment of some mergers. He has supported efforts to repeal the estate tax, the capital gains tax on savings and investment, and taxes on dividends."

(emphasis added)

The pressure to delay FASB rules is especially egregious - accntg treatment of mergers is an area that is rife for abuse and can make investors unwittingly very vulnerable.

[CAcyclist]

9. The new reporting rules

Companies are supposed to start reporting options as expenses.

Some companies, like Siebel Systems, will have to show a loss instead of a profit if they expense options the way the SEC wants them to. That will cause their stock price to decline. Thus, the companies want a looser interpretation of the rules.

[RUMPLEMINTZ]

12. Why would reporting

stock options make the stock go down? Don't you think that would be priced into the stock already? A procedural change is not going to affect net income. I agree that options should be reported, the more transparency the better, I just disagree that it will have any affect on stock prices. At least in the long run.

[CAcyclist]

13. Long run true, but investors live in the short run

I don't believe in the perfect market theory whereby issues such as these are already "priced into the stock". If the market was this rational, Enron and the whole dot-com bust would never have happened.

[RUMPLEMINTZ]

14. Or happened a lot

sooner. :) That was the problem with the dot coms. People were paying up for companies that didn't have any earnings. Buying stocks on growth potential only is a recipe for disaster. I've been trading stocks for a little over 10 years and the only dot commer I ever bought was yahoo. Unfortunately most people don't pay enough attention to their investments. I always wondered why they didn't just buy some of those old boring income producing mutual funds. They're not very exciting but you'll get your 10% annual return.

[amandabeech]

16. The 1995 Securities Litigation Reform Act made it more

difficult for defrauded investors to sue those responsible for the fraud. Corporations and investment company types love it because they never, ever think that they do anything wrong or don't care that they do. Believe me, they do a lot wrong that never leaks out. The Wall Street culture was not born in Mr. Rogers's Neighborhood.

Cox helped draft the legislation and push it through Congress. He can be expected to go lightly on anyone hauled in for fraud, whether it is individual corporations, mutual funds or hedge funds.

There have been reports recently that some hedge funds are in trouble. Donaldson has been a force in regulating those funds, and if I were a conspiracy buff, I'd say that Donaldson's departure and Cox's nomination means that there's trouble ahead.

[RUMPLEMINTZ]

17. Sarbanes/Oxley has fixed

most of those problems. That's a good thing. It's about damn time too!

Hedge funds are for the most part unregulated, it's the mutual funds that were in some trouble a couple of years ago. They were letting hedge funds "time" the market. What the mutual fund would do is let a hedge fund buy a bunch of shares after the close at like 3:15pm central time right after, say, Intel reported a great quarter, the hedge fund would then flip those shares in the morning for a huge profit. The hedge fund would pay the mutual fund a couple of million dollars to do this and the hedge fund would make double that amount. The loss to your average Joe was only a few pennies but it's illegal nonetheless. Spitzer really cracked down on those scumbags though.

[amandabeech]

23. Sarbanes Oxley helps. But it won't be long before the real scumbags,

and their lawyers and accountants, find another means to acquire ill-gotten gains. This Cox creature will cheer them on, not try to bring them to justice.

It's just the opinion of someone who's glad she doesn't have to deal with these creeps anymore.

[amandabeech]

15. It has been the practice to assign zero value to stock options

issued in lieu of compensation. Most economists believe that those options have actual value that is drained from the current shareholders by causing the ultimate dilution of shareholders' equity.

If corporations must deduct the actual value of the stock options from its profits, as they do for other forms of compensation, net income will decrease, and, in many cases cause that income to turn to loss. The loss must be subtracted from shareholders' equity, and the market value of the shares will go down accordingly.

[RUMPLEMINTZ]

18. I completely disagree.

How would anything operationally be different between the day before they expense their options and the day after they expense their options? Nothing. Just a procedural change. It doesn't make a difference if a company has negative earnings. There are many great companies that keep appreciating in value that have negative earnings so the fact that when a company makes that procedural change and the earnings go from the black into the red won't make any difference. Sure, the price may fluctuate for a few weeks until the institutional money figures out where the balance is.

[Justitia]

20. Expensing options (realizing them) is a direct hit to EPS -eom

[RUMPLEMINTZ]

22. I guess I'm not being clear,

expensing options is not an unknown, so it won't make any difference. It's already "priced in." The analysts know exactly how much options are worth, if it were an unknown then it would most definately affect the stock price.

[amandabeech]

24. The analysts do not know when, at what price and how many

options will be exercised. Analysts also don't know how many options or other derivatives will be granted tomorrow. Many analysts are also very sloppy, and tend to move in packs. They also serve masters other than you.

I also find it telling that so many corporations have fought clear options disclosure and options expensing throughout the years if the analysts already had everything factored in, as you suggest.

You obviously hold the industry in much higher regard than I. I can only wish you good luck.

[RUMPLEMINTZ]

25. I guess I hold the

corporate world in enough esteem to be a fairly successful trader for the past decade. I do agree that there will be plenty of shananigans with these options. Hey, I never said I like these people, they're freakin scumbags, I just want to make money off them.

They have some pretty strict regulations on when an insider can sell. I'm not sure exactly but they only get about 6-10 days a month in which they can sell. Of course they won't be able to know exactly what price the stock will be when it's sold but they'll come up with a pretty good formula. Don't forget that expensing options will only affect a minority of stocks, those high beta tech stocks like Google, E-Bay, Amazon, Valueclick, etc...

[flpoljunkie]

26. More on Mr. Cox from today's New York Times...

http://www.nytimes.com/2005/06/03/business/03cox.html?pagewanted=all

William Lerach, a prominent shareholder lawyer in San Diego who a decade ago found himself on the losing end of the political battle over investor lawsuits, agreed that the Republicans on the commission will now be more unified. But as a result, he argued, the policies it sets could be devastating for investors.

"I would expect that Cox will use his authority for an across-the-board assault on investor protection," Mr. Lerach said. "In my experience with him, I found him to be virulently anti-investor and unrestrained in his desire to gut the securities laws. It's hard to think of a worse choice for the S.E.C. This is a world-class payback to the corporate world."

Mr. Lerach recalled that the final legislation Congress adopted to restrict investor lawsuits, the Private Securities Litigation Reform Act of 1995, was much milder than the legislation Mr. Cox first proposed. That bill had significantly raised the standard of proof for investors and had included a provision forcing the losing party in such lawsuits to pay legal fees, a provision that some experts said would have effectively killed most investor lawsuits. Ultimately, lawmakers adopted the Senate version of the measure, which did not include those provisions.

<>Senator Charles E. Schumer of New York, a Democratic member of the banking committee, said he wanted to learn more about Mr. Cox's views before deciding how to vote on him. "Donaldson achieved a good balance," Mr. Schumer said. "The question is whether Cox sees the need for balance. If he sides with somebody like Atkins, who doesn't believe in regulation at all, then we will have trouble."

[RUMPLEMINTZ]

27. I still don't see

any specifics that Mr. Lerach says will hurt the market. Something about making it more difficult for investors to sue. I don't see that affecting earnings for any specific company. Earnings trumps all in the long run. If you can find something that Cox will do to affect earnings please let me know and I'll short the market. Speaking of shorting the market, why do you think most investors don't do that? I mean, if you think the economy is going to tank all you have to do is short the Nasdaq and you'll make a fortune if it does tank. I wonder if most investors even know you can make as much money when the market goes down as you can when it goes up?

[flpoljunkie]

29. Perhaps you do not want to see. We need the SEC to do its job.

Marc E. Lackritz, president of the Securities Industry Association, one of Wall Street's lobbying groups, praised the appointment. "He has a particular sensitivity to costly and unnecessary regulation," Mr. Lackritz said. "He understands that the increased costs of regulation put an unnecessary tax on investors."

But Barbara Roper, director of investor protection at the Consumer Federation of America, said that Mr. Cox's record was not encouraging to her. She said she was particularly concerned that his close ties to Silicon Valley would lead him to take steps to roll back a provision of the Sarbanes-Oxley Act that requires management to assess the effectiveness of internal financial controls and report on weaknesses.

[amandabeech]

30. Good for you. I was corporate and securities lawyer for many years.

Obviously, we've seen things from different perspectives.

[Justitia]

19. potentially dilutes the value of the stock. -eom

[Zynx]

28. Most companies I invest in don't have that problem.

I don't invest in speculative tech names that are now has-beens.

[amandabeech]

31. Most of the time, the investing public won't know about the problems

until the plaintiffs' bar, the SEC or an active AG/prosecutor type gets going. It's hard to tell which sector will be the next to figure some way of goosing the financials in a way that might slide with the regulators.

[CAcyclist]

11. Some urls:

http://www.nysscpa.org/cpajournal/2005/105/essentials/p28.htm

Early Adopters Plan for Changes

By J. Gregory Kunkel and Richard T. Lau

E-mail Story
Print Story
JANUARY 2005 - Its exposure draft to require the expensing of stock option grants is one of the most controversial standards ever proposed by FASB. Supporters of the standard argue that stock option grants are indeed a form of compensation and should be recognized as an expense on the body of the income statement. FASB’s proposal is also in line with the current requirements of the International Accounting Standards Board.

Opponents of the proposed standard argue that its implementation will hurt the competitiveness of American industry, especially of technology companies that rely on stock options to attract and retain key employees. Opponents argue that existing accounting standards adequately disclose the effects of stock option grants through diluted earnings-per-share calculations and the required footnote disclosure. In addition, opponents argue that FASB’s proposed methods of valuing stock option grants will yield meaningless expense numbers. The lobbying against the proposed standard has become so intense that the House of Representatives recently passed a bill that would require expensing of options for only the top five executives of publicly traded companies.

According to Standard & Poor’s, the proposed accounting rules would reduce reported 2004 earnings among the S&P 500 by 7.4%. The effect on the reported earnings of many technology firms will be much greater. For example, in an August 2, 2004, press release, Intel reported that its second-quarter 2004 profit would have decreased 17% if it had expensed its stock options. As a result, trade groups, such as the American Electronics Association, have vigorously opposed the proposed rules.

The proposed standard has at least one virtue: It levels the playing field between stock option grants and other forms of stock and cash compensation. Under existing accounting rules, restricted stock grants are considered an expense, but fixed, “at the money,” stock option grants are not.


http://www.mercurynews.com/mld/mercurynews/business/11322879.htm

Nationwide, 850 companies have adopted the new accounting rules. But only a handful of tech companies, including software giant Microsoft and tiny maverick Netflix, have adopted them.

``It certainly doesn't help those who are trying to buck the tide,'' said Dave Sullivan, a national audit partner for Deloitte & Touche in San Jose. But IBM's decision will spur few valley companies to throw in the towel, he predicted.

The new rules have far-reaching implications for companies and workers across Silicon Valley. Many investors like them because they will help tighten the spigot on stock options to rank-and-file workers. They contend the current rules allow companies to overstate profits.

But technology companies have fought the changes because they will be forced to erase billions of dollars in profits. Industry lobbyists say the new rules will hurt tech companies more than other companies because they issue more options. The new rules will exaggerate the cost of options and are susceptible to accounting mischief, they say.

An older call to action prior to this rule being passed:
http://www.citizenworks.org/corp/options/options-main.php
Stop the Stock Options Con Game

An explosion in the use of stock options as executive compensation fueled the recent epidemic of corporate fraud and abuse. The possession of huge quantities of options led many greedy executives to do everything they could (including cook the books) to drive the stock price up so they could cash in while the stock was artificially high.

Although corporations are entitled to a tax deduction when stock options are exercised, loopholes in accounting rules continue to allow corporations to avoid counting them in financial statements when they are issued, creating misleading financial reports.

Financial regulators and other experts have long proposed expensing options (i.e. closing the accounting loophole) as a critical step toward providing investors and others with a clearer financial picture of a corporation and restoring confidence in the markets. But many companies that use options -- especially many high-tech executives -- continue to fight to keep the accounting loophole open.

Citizen Works believes that expensing options is a modest yet important reform.

[The_Casual_Observer]

4. cox is the hackiest of the rw hacks

I wonder who they will run to fill his seat? That part of OC is very rw.

[Doctor_J]

21. Donaldson was asked to resign after enforcing the law too vigorously

how dare he!