Speech by SEC Chairman:
Remarks at the Annual Meeting of the Society of American Business Editors and Writers
Chairman Christopher Cox
U.S. Securities and Exchange Commission
May 1, 2006
Thank you, Jon, for that kind introduction.
Jon has a great job, and a great responsibility, at the Orange County Register. Writing about real estate in Orange County is like writing about the movie industry in Hollywood, or the oil industry in Houston, or the white collar defense industry on Capitol Hill. Jon is at the center of the action in one of the most remarkable real estate markets in the country. And the paper of which he's an editor — the Orange County Register — is one of our nation's greatest metropolitan dailies.
Having represented Orange County for 17 years, I still haven't forgotten how to point out that Orange County's three million people make it larger than 20 states with 40 Senators, and that its economy is larger than those of 180 countries — including such dynamos as Singapore, Israel, and Ireland. The Register does a great job covering a truly important and diverse region of our nation.
It’s great to be back in Minnesota. As Jon mentioned, I grew up here, right across the river in St. Paul. And a good part of my family is still here. In fact, my dad, sister and brother-in-law are with us here this morning. If I may introduce them — please, stand up — my father, Charles Cox; my sister, Molly Ziton; and my brother-in-law, Bob Ziton.
Thanks for being here today to make sure there's at least six hands clapping at the end.
Being a native, I know what the weather can be like here. So I dressed warmly. I was pleased you planned this conference for May. Not just because my years in Southern California have caused me to lose my taste for scraping ice off windshields, or having to stop the car at each intersection, get out, and walk past the 12 foot snow banks just to check for oncoming traffic. No, my greatest relief in being asked to speak in Minnesota in May rather than in January comes from knowing that the invitation was not the result of someone saying, “It’ll be a cold day before we invite that guy.”
As a kid, I used to love the arrival of May, and watching the snow begin to melt. (Although I did hate having to put away my sled for three long months.) For all that, it isn't true that Minnesota has only two seasons — winter and the 4th of July. It was in the 40s outside this morning, for Pete’s sake, and it will be in the mid-50s by noon. For Minnesotans, that’s time to break out the Hawaiian shirts and shorts.
Being back home again reminds me of a story that's rather famous in Minnesota — about an old farmer, Homer Frizzell, who lived near Prior Lake, not all that far from here, just southwest of the Twin Cities.
Old Homer was having a rough time of it, because as of late he was living alone on his farm, without any other family. It was a sad story. Earlier that year his only son, Joe, had been sent to prison for insider trading and fraud, after playing in the commodities futures market. Worse yet, Joe had gotten the maximum sentence, because he never revealed where he’d hidden the money.
Well, old Homer didn't know anything about that, but he sorely missed the help that his son Joe had provided every year, digging up the corn field in time for planting season.
Even with the old farm equipment they had, Homer knew he couldn't handle it by himself. He wrote a letter to Joe in prison:
It’s planting time, and I really miss how you took care of plowing our field each year. The ground is hard. And I'm probably too old for all that work. But if we don't get our corn in the ground, our farm’ll go belly up. So I’ve got to at least give it a try.
A few days later the old man received a letter from his son in reply:
Do NOT dig up that garden!
Repeat: DO NOT DIG UP THAT GARDEN.
Well, of course this letter from prison had been opened and read before it was even placed in the mail. So, not surprisingly, the morning after Homer received the letter, a team of FBI agents arrived at the old man's house and dug up the entire field. But here's the amazing thing: they didn't find any money or any evidence. So, they just apologized to old Homer and left. A few days later, the farmer received another letter from his son:
You can go ahead now and plant your corn, seeing that the field's all dug up. Happy to send those Federal agents to help. Love, your son, Joe
Well, maybe that story is from Lake Wobegon, and not a real place like Prior Lake, since I can't find any record of it in our enforcement files. In any case, just like the Feds in that story, we at the SEC are happy to be of help to SABEW, to each of you, and to the profession you represent.
For a group that's focused on business and finance, which most people would concede are headquartered on the East Coast, I have to say that SABEW has got a remarkably Midwestern flavor. Your Society is based in Columbia, Missouri; you’re holding your annual conference in Minnesota; and you just named the Minneapolis Star Tribune as the winner of the best in business category. Your incoming President is even named Dave Kansas.
Of course, there's a great tradition in journalism — especially broadcast journalism — of Midwestern influence. Walter Cronkite was from St. Joseph, Missouri. Harry Reasoner came from Dakota City, Iowa. Tom Brokaw grew up in Webster, South Dakota. There have been many others: John Chancellor; Jim Lehrer. It's a long list. Many theories have been advanced to explain this, including the relative lack of a regional accent that makes Midwesterners more easily understandable to the rest of country; and the sort of plain-spoken just-the-facts-Ma'am presentation that ordinary folks can relate to.
It's not an easy job — the work you do — taking complicated events and concepts, and translating them into language that millions of people from thousands of different walks of life can easily grasp. The result of this arduous process of digesting all the relevant facts, unraveling the intricacies, editing out the non-essentials, and getting to the real heart of the matter in a straightforward way is what we often call plain English.
It's one of the essential ingredients in establishing trust: saying what you mean, and saying it clearly. Conversely, people are natively suspicious of obscure language that makes things harder to understand. It always raises the question: what's that fellow trying to hide behind that fog of words?
That's why, at the SEC, we're getting into the plain English business too. Our capital markets rely on trust, and investors can't trust legalese and jargon.
Unmasking fraud often consists of exposing the simple truths hidden in the midst of intentional complexity. There's a trial going on in Houston right now that offers a perfect example of this. Back in 2001, when many analysts were praising Enron, Fortune's Bethany McLean made the straight forward observation that the company was "in a bunch of complex businesses. Its financial statements are nearly impenetrable."
So why, she asked, was Enron's stock selling for 55 times its earnings? Why did Enron deserve a greater multiple that was 2 1/2 times higher than its nearest competitor?
Eventually, when Enron’s real business model was explained in plain English — first by journalists, and eventually by the SEC, law enforcement officials, the Congress, and even Hollywood — the world learned anew that if a company can't explain its business so you can understand it, maybe it doesn't have a real business.
Plain speaking journalists, who use plain English to give investors the important facts they need to know about business and finance. That's a fair description of this group. The truth is, the SEC couldn't do its job without you.
The SEC would eventually have found out about Enron. But as it happened, the Commission first got interested because our staff read in the Wall Street Journal about suspicious partnerships run by Andy Fastow.
There are many other examples of journalism blazing a trail that SEC has followed. Very recently, in SEC v. Ross, the Commission filed civil charges in Connecticut against five individuals for fraud in an initial public offering. A reporter for the New Haven Advocate had been solicited to participate in the IPO, and wrote a column about it. The US Attorney's Office then picked it up, and they in turn referred it to us.
Another recent case, SEC v. Sacane, was filed after both the Wall Street Journal and the New York Times ran stories on the same day about allegedly fraudulent deals to purchase two biotech companies.
Sometimes it's not the initial idea, but a new angle, that a story helps us with. There are many examples of cases that are already underway when a later story in the paper inspires enforcement staff to alter the course of our investigation.
That kind of conscientious coverage of the financial news is an invaluable service to the American people, to the SEC – and to me personally. After all, it was from press reports that I first learned that the agency was issuing subpoenas to journalists. The truth is, sometimes your efforts provide a more efficient way for me to find out what's going on than the SEC's own interoffice memos.
I’ll tell you right now, we can’t compete with the sheer size of your investigate ranks. The SEC has fewer than 4,000 employees. That’s counting everybody. Yet this year alone we expect to receive over one million consumer complaints.
Chasing these down to begin with is a daunting task. Then we have to determine which cases merit a formal investigation. That means that every SEC employee would have more than one complaint to chase down every working day. And of course it isn’t just the one million complaints that trigger potential enforcement action. For example, there are irregularities that we uncover from our inspections of companies and from the statements and documents that they file with us.
On the other hand, the News Media Yellow Book counts over 33,000 journalists in leading news media publications. (That’s a conservative estimate.) Your society alone has more than 3,500 members. You do the math on that.
It’s clear: we depend on your work. And occasionally, the credibility of journalism depends on the SEC doing its work.
Everyone here remembers Foster Winans. His case is a painful reminder that trust is the glue that holds our system together. And it’s a reminder that both journalists and law enforcement, from different directions, have got to work continuously to ensure that those who violate that trust are brought to account.
Foster Winans, who was found guilty of 59 separate counts of securities fraud, is by no means the only journalist who has stood accused of law breaking, and who brought disgrace to your profession.
Last year, CBS MarketWatch columnist Thom Calandra settled civil fraud charges brought by the SEC alleging that he sold stocks after touting them in his newsletter.
And just last month there was the case of New York Post Page Six reporter Jared Paul Stern, who is being accused of demanding huge payments in exchange for refraining from publishing falsehoods about his victims’ personal lives.
Whenever there are charges that journalists are violating the securities laws, the SEC will not fail to pursue them. But the overarching aim of our efforts is to strengthen our working relationship with financial journalists.
We will never make compromises when it comes to the First Amendment. We will give equal dignity to the public’s interest in the freedom of information, and the public’s interest in effective law enforcement.
The SEC now has in place a clear and comprehensive set of guidelines on the when, how, and why of the issuance of subpoenas to journalists. These guidelines serve not only to clarify procedures for our agency, but to acknowledge and reaffirm for the American public the singular role the press plays in protecting our freedoms.
I know you’re all very familiar with the particulars of this policy by now. I think you'll agree that, by government standards, it's a remarkably straightforward document. We took special care to craft it in clear, simple terms so that there is no doubt about our intent. The considerable restrictions and conditions that must be met before issuing a subpoena are all designed to ensure that any such legal measures are exceedingly rare and employed only as a last resort.
Are these guidelines sufficient to avoid all controversy in the future? Probably not. There are, after all, limits to everything. The law of gravity still applies, the sun will rise in the east, and the government's going to get flack if it ever investigates the press. And, after all, that's pretty much how our Founding Fathers intended it.
I want you to know that I have a very personal reason for wanting to support your mission as journalists in my new role as Chairman of SEC.
My deep commitment to a free press was born in substantial part from an experience I shared with my father a generation ago, publishing daily translations of Pravda, the official organ of the Communist Party of the Soviet Union – and, for lack of any other lawful alternative, the nation's leading newspaper.
To many Americans, especially young people who've never confronted life without unlimited freedom, the idea of business journalists being muzzled by government is probably unimaginable. But all of you know better. You know that a controlled press was the order of the day in the Soviet Empire, and that it is still a stark reality today in China, Vietnam, and a number of other countries that are America's business partners.
From my experiences with Pravda, I can give you some concrete examples of what the end of press freedom in our country might look like.
For starters, all of the content in the Soviet Union's newspapers was censored in accordance with the so-called "Index of Information Not to Be Published in the Open Press." The Index was a long list of subjects that could never appear in print in the Soviet Union, including such items as figures for financial transactions with foreign countries, whether economic or military; details of the censorship system itself; crime statistics;
locations of labor camps and prisons; any news reports about civil unrest; and any news of labor strikes. A censorship number appeared at the bottom of the back page of every edition of Pravda, in the form of the letter B plus a five-digit number.
And the news wasn't just suppressed. It was also fabricated.
For example, Pravda repeatedly told its 50 million readers that AIDS is the product of sinister CIA and FBI experiments on jailed political prisoners.
Here is what the Communist Party of the Soviet Union announced as the doctrinal basis for the state's total control of the media, and the subordination of factual reporting to the objectives of the state:
"The party considers television, radio, and the press as a powerful instrument of publicity and social control. . . . True to Leninist precepts, the Soviet press serves as a collective propagandist, agitator, and organizer of the masses."
This may sound like an early 20th century anachronism, but it isn't. It was published when Mikhail Gorbachev was General Secretary of the Party, and it appeared in the May 5, 1986, edition of Pravda.
Imagine, if you will, as business journalists, living in a nation in which the world's worst nuclear meltdown couldn't be reported in the press. The Chernobyl disaster was not even mentioned in Pravda for three weeks — and then it was wrenched from the Party only after non-stop international outrage. Ironically, it was on this day, today, exactly 20 years ago, that the Soviet news agency Tass finally reported on Chernobyl.
Even then, the stories that finally appeared in print were preposterous. One Pravda article, which Dave Kansas may remember because Dave’s sister, Narrah, worked at our company when we translated it, was titled "Souvenirs From Under the Reactor." It told the story of supposedly contented workers doing their "deeply satisfying" chores at the reactor core. In real life, we now know from independent sources, unwilling men and women had to be forcibly conscripted for that life-threatening task. But in the Pravda story, one happy worker offered the Pravda correspondents two small stones he’d chipped away from the reactor base.
"'Take these as souvenirs,' he said, handing the chips to the reporters. 'Soon the spot where we are standing now will be filled (with concrete), and nobody will ever be able to touch the base of the reactor.'" The Soviet Union’s leading daily deadpanned this obviously fake vignette as implicit evidence that the radioactivity at Chernobyl was hardly a danger to anyone.
I offer you these experiences for only one reason: to encourage you to be steadfast in your defense of your profession, and to remind us all what a nightmare world we would live in if there could be no trust in journalism, no trust in government, and no trust in business. Everything we've come to take for granted – including competition, markets, and the prosperity they produce – would be lost.
That's why, 20 years ago, my father and I set out to strike a blow for freedom of the press on behalf of people who could not. We published Pravda in English, so that free people could see the truth about state control of the press for themselves. For that invaluable experience, I want to take the opportunity of my father’s presence here today to say thanks to my partner in that venture for freedom. Dad, as my mentor, my friend, and my business partner, you’ve taught me more than you’ll ever know about the importance of freedom of the press to every other freedom that we enjoy.
And that's why, 20 years later, I'm working to see to it that the agency I lead always respects the essential role of journalists.
Yes, you’ll face resistance whenever you pursue unpleasant facts. And yes, you’re sometimes going to take flack. People are always going to try to shoot the messenger. But you can be confident in knowing that the SEC will not be one of them. In our common pursuit of full disclosure of the facts that America’s investors need to know, we’re on the same side. Through your professionalism, your integrity, and your diligence, you help secure America’s liberty – and you help the SEC do the same.
Today, May 1, was a great national holiday for a regime that controlled the media and used it for oppression. It’s fitting that all of us gathering here in Minneapolis are marking this day by celebrating the freedom of our press.
Just as we rejoice in the freshness of this rain-washed spring day — a day of clean air, open windows and the promise of sunshine — America rejoices in the fresh air and sunlight that you, the members of our free press, bring to the nation.
You have my heartfelt respect. Thank you for what you do. We at the SEC are honored to be your partners.