Sheriff's law versus judge's justice

So Chris Cox says he believes in the "rule of law". Big deal. The statement disappointed commentators who wanted specifics on the plans of George W. Bush's nominee to head the US Securities and Exchange Commission. Without concrete information, the commentators are trying to draw a contrast between Mr Cox, a presumed softie in regard to regulation, and "toughie" William Donaldson, the departing chairman.

But Mr Cox is not the anti-Donaldson. He is the anti-Spitzer. The Spitzer being Eliot Spitzer, New York's attorney-general. And the difference is not between "tough" and "soft". It is between two kinds of justice - that phrase about rule of law matters after all. Mr Spitzer is a sheriff making law among the bad guys as he goes along. He ignores the legal establishment. Mr Cox is the old country judge who is part of that establishment, the sort who puts on his glasses and pulls down a book when a case comes to his wooden desk. The president believes that US markets need more of the second sort of justice. That is why he chose Mr Cox.

The sheriff and judge model comes clear when you compare the Spitzer and Cox careers. Mr Spitzer, a true sheriff, responds first to what he perceives to be the needs of the people. Post-Enron, Americans wanted scapegoats. Mr Spitzer, a new attorney-general who had focused on challenges such as street crime, set about prosecuting Wall Street.

Two characteristics marked his work. The first was a radical interpretation of old laws. New York has a law called the Martin act, an obscure 1920s statute that gives the attorney-general power to prosecute statewide fraud cases that had formerly fallen under local jurisdiction. Mr Spitzer stretched the Martin act like a rubber band and used it as a national, even an international, weapon. The second Spitzer habit is squeezing settlements out of companies rather than going to trial. This enables him to set precedent while bypassing judge and jury to write law, in effect.

Mr Spitzer's sheriff work won him fame; he is now running for governor. Some younger Americans - the sort who do not know westerns - think of him not as a sheriff but as their own "Mr Incredible", the superhero of the recent film. Mr Spitzer's office overshadowed what seemed a tame Securities and Exchange Commission. An embarrassed Mr Donaldson sought to "out-sheriff" Mr Spitzer; envy may have helped transform Mr Donaldson into such a toughie.

But the Spitzer culture has also done enormous damage. In an era of Spitzers, no company or executive knows where the sheriff will strike next. This "Rule of Sheriffs" helps explain why stocks have been trading sideways for so long. Mr Cox's career, by contrast, has been about acting within legal tradition and reducing uncertainty. In the 1990s, "strike suits" gave shareholders the option to sue corporations when the share price had dropped. Mr Cox wrote legislation to reduce such suits. He even included an English rule, whereby the loser would pay the legal costs of the winner. The idea was to reduce the "we'll make you rich" incentives created by the contingency fee. The plaintiffs' bar saw to it that the English rule was removed, but the law as passed still reduced abuses.

Where he sees wrongs, Mr Cox determines to right them, but through the sort of meticulous documentation that would stand up in court. As a young man he was convinced Americans would see the wrongs in the Soviet Union if they knew what was going on there and so founded a business to translate Pravda into English. In the late 1990s, Mr Cox led the bipartisan Cox Commission in investigating whether China was secretly strengthening its nuclear armoury. The focus - brave for a representative from Asia-oriented California - was not "convicting" China but rather building up the case against her. The penchant for casework extends to his literary ambitions. Mr Cox hopes one day to correct a 300-year old error by writing a thriller about Gottfried Leibniz and Isaac Newton. He believes that history gave the German logician too little credit for inventing differential calculus, and Sir Isaac too much. Together with the two more conservative commissioners, Mr Cox is likely to create a 3-2 majority that votes for rules more grounded in due process. The Donaldson SEC required hedge funds to register with the commission for the first time. Mr Cox might review that. It is especially troubling that the SEC, sheriff-like, plans to manage hedge fund regulation alone. At the moment, companies and their shareholders pay twice for sins in financial fraud cases: once when the stock price falls as they are investigated and again in fines. This breaks with the tradition of letting the punishment fit the crime.

But the principal Cox focus will be the old fight against uncertainty. SEC regulations these days are murky. One effect is to give SEC staffers inappropriate power. If the rule is not clear, they, mini-Spitzers, exercise enormous discretion in choosing how to proceed on a case. Mr Cox will probably confront the language problem. He may also restaff. Part of reducing uncertainty is firm and consistent enforcement. Those who expect a soft touch under "Judge" Cox will be disappointed.

In short, you do not have to wonder what Mr Cox might do. Through an old truism of a phrase, "the rule of law", he has already told us.

© Copyright 2005 Financial Times

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