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SEC Shift, Arthur Andersen Reversal


This is WEEKEND EDITION from NPR News. I'm Scott Simon.

Coming up, a how little could you live on if a natural disaster struck your house?

But first, exit William Donaldson; enter Christopher Cox. There may be enough drama between those two sentences to insert a morality play on US business. This week Mr. Donaldson surprised many when he announced that he'll step down as chairman of the Securities and Exchange Commission. The White House has nominated Representative Cox, a Republican from California, to take over. The change has been widely interpreted as a dramatic shift in how big business is regulated in the coming years and how the interests of investors may be represented. Joe Nocera is our friend from the business world and a columnist for The New York Times. He joins us from WFCR in Amherst.

Joe, thanks for being with us.

JOE NOCERA (The New York Times): Thanks for having me, Scott.

SIMON: Joe, William Donaldson took over in 2002, and this was a time--we should remind ourselves--when there were several major corporate scandal investigations that were going on. Harvey Pitt, who'd been formerly head of the SEC, had been assailed for, essentially, letting a lot of scandals occur on his watch and not exercising enough oversight. So William Donaldson comes in. What changed under him?

NOCERA: Donaldson came in and basically said, `We want to catch the bad guys. That's our priority.' And much of what he did at the beginning sent a powerful message to Americans and American investors that the government was not going to put up with financial shenanigans, and, boy, at the time he did that, that message desperately needed to be sent. Fundamentally, he's a Republican who was siding with the two Democrats at the SEC, much to the disgust of the two Republican commissioners on the SEC, and there was a belief in the business community that he was, basically, overregulating.

SIMON: When you say, `Siding with the Democrats,' give us a couple of issues in which that was noteworthy.

NOCERA: Mr. Donaldson, who, by the way, you know, earned his stripes on Wall Street and really understands Wall Street quite well, helped push through a rule that would force hedge funds to--which are now largely unregulated private pools of capital that have become an enormous force in the marketplace; they now have a trillion dollars in total--he just wanted them to--they weren't even talking about regulation. They were just talking about registering them so the government would at least know who's out there and what they're doing. And the Republican commissioners were violently opposed to this and believed it was a classic example of government meddling where it shouldn't be and opposed it. That's one example among many.

SIMON: Congressman Cox is expected to be different?

NOCERA: He most certainly is, although, you know, Scott, let's be fair here. He doesn't have the job yet, and he certainly has said things in Congress along the lines of, you know, `We need good accounting standards. And we need to punish wrongdoers in the securities markets to the extent possible by the law,' and so on and so forth. But he is, for instance, a very strong critic of class-action lawsuits and worked very hard in the '90s to pass a bill that would make shareholder lawsuits much more difficult. He's also been a very strong critic of the move to expense stock options. That'll be pretty much the first issue in front of him.

SIMON: I don't understand expensing stock options.

NOCERA: When a company issues stock options, you know, they have a value. They have a value to the employee, and they will ultimately be an expense to the corporation. And the move to expense stock options is just a move to basically give shareholders a more realistic picture of what a company is doing.

SIMON: The announcement about the change in leadership at the SEC comes the same week that the US Supreme Court overturned the conviction of the accounting firm Arthur Andersen in connection with the Enron scandal. But the company, for all practical purposes, is kaput. Does this decision come too late to save anybody's job, and does it throw the prosecution of the company into some question?

NOCERA: Well, it's too late to do anything except allow people at Arthur Andersen's to say, `We were unfairly prosecuted.'

There are two things to be said about this case. The judge in Houston, during the trial, gave bad instructions to the jury. Who knows what the jury would have decided if she had given the proper instructions. The second point that needs to be made here is that Arthur Andersen--this was their third strike, Enron. They had messed up in Sunbeam, they had really messed up in Waste Management. They had been fined. They had been told not to do it again. And this is the company whose management had stopped thinking of themselves as the investor's friend. And, don't forget, of all the things that have happened in corporate America since the Enron scandal, I don't think there's been any single corrective that's been more important than the prosecution of Arthur Andersen. Because, boy, if that wasn't a wake-up call to every accountant in the United States to say to themselves, `That could have been me, and that might be me next time'--I'm sorry. I'm not that sorry they're out of business.

SIMON: Joe Nocera, columnist for The New York Times. Thanks very much.

NOCERA: Thank you, Scott. Transcript provided by NPR, Copyright NPR.