Investigation of WSB Financial Group, Inc. (WSFG)

Hagens Berman Sobol Shapiro LLP has begun an investigation of a possible securities fraud legal action on behalf of investors who purchased the shares of WSB Financial Group Inc. (NASDAQ:WSFG) of Bremerton. On Wednesday October 24, 2007 the Company announced that State and Federal regulators are looking into possible fraud and misconduct in its real-estate lending practices causing the company’s shares to plummet 42.9 percent.

In an 8-K filing with the SEC on on October 23,2007 WSB Financial has revealed that examiners from the Federal Deposit Insurance Corp. and the Washington Department of Financial Institutions recently told management they believed the bank "violated certain banking laws and regulations which are primarily related to the origination, administration and monitoring of construction and mortgage loans." The company filing states that:

"The examiners advised that they intend to recommend that the FDIC and DFI take regulatory action against the Bank with respect to such lending practices and activities, which may include a cease and desist order, monetary penalties, further increases in allowances for loan losses, reserves and/or charge-offs.

Additionally, the company has been cooperating in an investigation by the regulators pertaining to certain past activities involving former employees and third parties, including possible fraud, misconduct and other violations with respect to the application, processing and approval of certain loans previously made. The company is also conducting its own internal investigation into the issues surrounding the past activities of mortgage and construction loan origination, and plans to retain an independent auditor to analyze these loans, particularly construction loans and assist the company and its management in determining the appropriate level of loan loss allowances, reserves or charge-offs with respect to such loans."

At the same time the Company has announced that its chief financial officer, Mark Freeman, had asked for and received a leave of absence to deal with unspecified "health reasons."

If you have further information concerning these facts or are a shareholder and want to be kept apprised of the investigation or of possible legal action, you can contact wsfg@hbsslaw.com or call the firm at 206-623-7292. For more information go to http://www.hagens-berman.com/wsb.htm.

Is the Tyco Class Action Settlement Good?

Will large institutional investors opt out of the proposed settlements in the In re Tyco International Ltd. Securities Litigation MDL Docket No. 02-1335-PB?

Pursuant to the Notice of Proposed Settlement sent to investors, the decision to be excluded from the Class must be made by September 28, 2007:

To exclude yourself from the Settlement, you must send a letter by mail to the Claims Administrator saying that you want to beexcluded from In re Tyco International Ltd. Securities Litigation Settlement. If you wish to exclude yourself from the Class, be sure toinclude your name, address, telephone number, and signature, and mail your exclusion request postmarked no later thanSeptember 28, 2007 to:Tyco International Ltd. Securities Litigation Settlement c/o The Garden City Group, Inc., Exclusions, Claims Administrator, P.O. Box 9199, Dublin, OH 43017-4199. Requests for exclusion should also list the amount and type of all Tyco Securities purchased, otherwise acquired, or sold during the Class Period, the prices paid or received, the date of each transaction and the amount or number of Tyco Securities held as of the beginning of the Class Period on December 13, 1999. You cannot exclude yourself on the website, by telephone or by e-mail. If you do not follow these procedures – including meeting the date for exclusion set out above – you will not be excluded from the Class, and you will be bound by all of the orders and judgments entered by the Court regarding the Settlement. You must exclude yourself even if you already have a pending case against any of the Tyco Settling Defendants’ Releasees or the PwC Releasees based upon any Released Claims.

I believe that situations justifying  exclusions from securities fraud class action settlements are the exception and not the norm.  But Tyco may be the exception.

Analysis of Settlement:

Procedural History and Settlement

Beginning in February 2002, Tyco and certain former directors and officers Ire named as defendants in over 40 purported securities class action suits. Most of the securities class actions were transferred to the United States District Court for the District of New Hampshire for coordinated or consolidated pretrial proceedings.

On January 28, 2003, a consolidated securities class action complaint was filed in these proceedings. On June 12, 2006, the court entered an order certifying a class:

consisting of all persons and entities who purchased or otherwise acquired Tyco securities betIen December 13, 1999 and June 7, 2002, and who were damaged thereby, excluding defendants, all of the officers, directors and partners thereof, members of their immediate families and their legal representatives, heirs, successors or assigns, and any entity in which any of the foregoing have or had a controlling interest.

On June 26, 2006, Tyco filed a petition for leave to appeal the class certification order to the United States Court of Appeals for the First Circuit. On September 22, 2006, the United States Court of Appeals for the First Circuit denied Tyco’s petition.

On July 6, 2006, the lead plaintiffs filed in the United States District Court for the District of New Hampshire a motion for a permanent injunction against prosecution of the class action styled Brazen v. Tyco International Ltd., et al. that was certified by the Circuit Court for Cook County, Illinois. On October 26, 2006, the court denied plaintiffs' motion for injunctive relief without prejudice.

On May 14, 2007, Tyco settled the 32 securities consolidated class actions. The settlement         does not resolve the following securities cases, which remain outstanding: Stumpf v. Tyco International Ltd., New Jersey v. Tyco International Ltd., et al., Ballard v. Tyco International Ltd., Sciallo v. Tyco International Ltd., et al., Jasin v. Tyco International Ltd., et al., and Hall v. Kozlowski, et al. The proposed settlement does not release claims arising under the Employee Retirement Income Security Act of 1974, 29 U.S.C. Sec. 1001, et seq. ("ERISA"), which are not common to all Class Members, including any claims asserted in Overby, et al. v. Tyco International Ltd., Civil Action No. 02-MD-1357-PB.

The Class Action releases all claims against Tyco, the other settling defendants and ten other individuals in consideration for the payment of $2.975 billion from Tyco. PricewaterhouseCoopers has agreed to make a payment of $225 million. L. Dennis Kozlowski, Mark H. Swartz and Frank E. Walsh, Jr., are excluded from the settling defendants, and the class will assign to Tyco all of their claims against defendants Kozlowski, Swartz and Walsh. In exchange, Tyco will agree to pay to the certified class 50% of any net recovery against these defendants.

The Settlement is Facially Attractive

The settlement amount of $3.2 billion is relatively large as far as securities fraud class action settlements go. Plaintiffs claim it is that largest single payment by one company to settle a securities fraud suit.

While the settlement notice does not state the amount of estimated aggregate damages, I can estimate that Lead Plaintiff’s Counsel has estimated it to be $10.8 billion. The Settlement Notice states that:

[I]f all Class Members make a claim against the Settlement Fund, the average payment to Class Members will be $1.474 per share of Tyco common stock, after taking into consideration the relative average payment that would be paid to purchasers of Tyco Notes during the Class Period (estimated at approximately 8% of total damages). Of this amount, fees and expenses requested by the attorneys will not exceed $0.30 per share of Tyco common stock.

To put this in perspective, the Settlement Notice also states:

The Class Representatives estimate that the approximate average amount of recoverable damages to members of the Class who purchased Tyco common stock were this case to go to trial would be approximately $5.423 per share based upon an estimate of 1.997 billion outstanding Tyco shares as of the last day of the Class Period.

This implies that the recovery represents 32% of the total losses, not including the notes. This percentage recovery is not a trivial amount, but is not great, considering the nature of this particular case where certain of the defendants Int to jail and the ability to collect on a judgment is not an issue.

By way of comparison, in 2005, the California Public Retirement System, (“CalPERS”), California State Teachers’ Retirement System (“CalSTERS”), and the Los Angeles County Employee Retirement Association (“LACERA”) announced a combined opt out settlement of $257.4 million in WorldCom.  The settlement appears to be part of a larger settlement of $652 million by a group of state and local retirement funds and insurance companies, which its attorneys claimed was 83% higher than the class action settlement. For some of the funds involved, this opt-out settlement purportedly represented more than 70 percent of their losses. Five New York pension funds announced a combined settlement with a multiple of three times over the class action. Moreover, the funds claimed that this settlement represented over 60% of their losses.

In 2007, in AOL Time Warner, CalSTERS claimed a 6.5 multiple on a settlement of $105 million out of damages of $135 million.  The State of Alaska claimed a multiple of 50. The University of California claimed a multiple range of 16-24 on a settlement of $246 million out of a loss of $550 million. The State of Ohio also claimed a multiple of about 16 after attorneys’ fees. The Ohio funds settled for $144 million, which it claims, is $138 million more than it would have received under the class action settlement, and represents 36% of its losses. A separate group of smaller investments represented by the same counsel did not fare as Ill with settlements of only about 15% of damages compared to the class recovery of a purported 1.4%.

While the recovery in this case purportedly represents 32% of  Lead Plaintiffs’ Counsel estimated damages one must look at their damage model and consider the alternatives they discarded.

More important, one needs to consider an institutional investor’s transactions in light of the Plan of Allocation attached to the Notice and the estimated inflation. The range of damages to class members is set out in the Plan of Allocation and shows, depending on what date the purchase took place, damages (or inflation per share) range from $0 to $8.29 per share. It may be that damages allocated to the securities purchased by a particular institutional investor will represent more or less than the average based on factors considered by Lead Plaintiffs’ Counsel. For example if an investor acquired shares in the Mallinckroft acquisition or in the June 6, 2001 secondary public offering, you will get a 10% premium. A 10% premium on a Section 11 claim is not large and would be worthy of further exploration if those are the shares purchased by you.

Similarly, if an investor purchased notes issued during the Class Period, the investors claims may be stronger than that of the Class as a whole.

The Settlement Amount Appears Low In The Light of the Public Facts.

Based on stock data reviewed that needs to be adjusted for various splits, Tyco stock dropped from over $235 per share ($58.75 before adjustment) in December 2001 to as low as $109 ($27.25)per share in January 2002, when questions arose about the accuracy of Tyco's bookkeeping and accounting. Bad news continued to come out over the next few months concerning the fraud and the theft. By the end of the Class Period the stock had dropped to $40 ($10)per share, though over the next 90 days (the 90 day lookback period) the stock had risen to as high as $65 per share with a moving average (or mean) on the 90th day of  $53.896 per share. ($14.974 pre-split).

   

Based on 1.997 billion shares outstanding, the loss in market capitalization from the end of December 2001 to the end of the Class period, thus, was $95 billion. Sixty percent of Tyco’s value was lost in January alone as the NASDAQ and the S&P 500 held their value resulting in a market capitalization drop of $71.19 billion.

When compared against the S&P 500, the NASDAQ Index and the Dow Jones Index, it does not appear that market drops were the causation of any of the drops.

A simple event analysis shows Tyco’s stock closed at $235 ($58,75) per share on December 31, 2001, before the bad news began to come out to $140.6 by January 31, 2002 and $92.4 ($23.1)by the day after the first class action lawsuits Ire filed on February 4, 2002.

By the end of the Class Period, on June 7, 2002, the stock had fallen to $40 dollars a share ($10) .

To recap, adjusted for the 4 for 1 split on July split, that is a decrease from $58.75 to $10. But pursuant to 15 U.S.C. Section 78u-4(e)(1) damages can be no more than the purchase price in Class Period and the 90 Look-Back median of $14.974.

Thus, absent other causation factors, the average payment to Class Members of $1.474 per share appears fairly small in comparison to the  $43.776 recoverable drop of the stock price. The settlement represents only 3% of the drop in market capitalization over the Class Period.

Why Lead Plaintiffs’ Counsel believes that at most there is at most $8.06 dollars worth of inflation, or damages, for those who bought before January 29, 2002, and why those who bought in betIen January 29, 2002 and January 6, 2002 have only $0.96 in damages is unexplained.

One can only surmise that they have calculated damages assuming that nearly the entire fraud for those who bought before January 29, 2002 was revealed on or about that date, and that the latter drops were actionable only based on statements made after that date. Based on an event study,, that does not seem plausible. Also unexplained is the failure to account for the remaining $23 in stock drop in January alone.

12/31/2001- 58.9
1/11/2002- 50.25
1/14/2002- 52.4
1/15/2002- 47.95
1/28/2002- 42
1/29/2002- 33.65
2/4/2002- 29.9
2/5/2002- 23.1

In essence, Lead Plaintiffs’ Counsel has discounted almost $27 of the $35.716 in potential damages in estimating losses to the portion of the Class, which bought before January 29, 2002. They discount further to settle for an average of $1.474 per share.

Liability Appears Extremely High

Liability in this case is almost uncontestable. We know from the SEC press release of April 17, 2006 ,  concerning its action, which Tyco settled for $50 million, that:

·        Tyco inflated operating income by at least $500 million from its many acquisitions by undervaluing acquired assets while overvaluing acquired liabilities. Tyco also manipulated various reserve accounts to meet earnings forecasts, according to the complaint.

·        TYCO inflated operating income by $567 million betIen 1998 and 2002 through the recording of fees that Tyco's ADT Securities Services Inc. subsidiary charged to dealers but that had actually been offset by ADT's purchase of security monitoring contracts from them. The transaction lacked economic substance, the SEC said, and should not have been recorded as income.

·        Tyco violated the anti-bribery provisions of the Foreign Corrupt Practices Act when employees of its Earth Tech Brasil Ltda. subsidiary paid Brazilian officials to obtain business in that country.

·        "The Tyco accounting fraud was orchestrated at the highest levels of the company, but carried out at numerous operating units and management levels of the company," Scott W. Friestad, associate SEC enforcement director, said in a statement. "'Push down' frauds like this are especially difficult to detect and investigate."

·        Tyco failed to disclose in its proxy statements or annual reports the executive compensation, indebtedness and "related party" transactions that Ire widely reported and led to the demise of the management team led by CEO L. Dennis Kozlowski.

Further, Kozlowski and former CFO Mark Swartz Ire convicted of grand larceny, falsification of business records and conspiracy as a result of their scheme to loot the company through multimillion-dollar "loans" that Ire ultimately forgiven, as Ill as unauthorized bonuses and exorbitant corporate perks. They are serving eight-and-a-half to 25 years in prison for their roles in the fraud.

Other Lawsuits

The Class Action settlement does not resolve all securities cases, and several remain outstanding. On November 27, 2002, the State of New Jersey, on behalf of several state pension funds, filed a complaint, New Jersey v. Tyco, in the United States District Court for the District of New Jersey against Tyco, our former auditors and certain of our former officers and directors. In addition, the proposed settlement does not release claims arising under ERISA, that are asserted in the consolidated ERISA class action, Overby, et al. v. Tyco International Ltd.

According to a press release dated June 13, 2007, a judge has refused to dismiss lawsuits by three smaller groups of former Tyco International Ltd. shareholders, a month after the company agreed to settle most shareholder claims arising from mismanagement and looting by former top executives. Still alive are lawsuits :

“by the state of New Jersey, former shareholders of AMP Inc. and former shareholders of a one-time Tyco subsidiary, TyCom Inc. U.S. District Judge Paul Barbadoro on dismissed some counts and defendants, but kept alive most of their claims against Tyco, its former executives and directors and the company's former auditor, PricewaterhouseCoopers LLP. ... [Barbardoro] also refused to dismiss most of New Jersey's securities fraud and racketeering claims -- valued at $100 million -- on behalf of its pension and other investment funds, including one that helps fund the state's public schools. ...”

Recoverable Assets

The ability to collect on any judgment does not appear to be an issue. The company has about $20 billion in annual revenues and, but for the Class Action settlement would have been profitable this last quarter. It has over $1.3 billion in cash and over $15 billion in shareholder revenue as of June 29, 2007.

Conclusion

It is difficult to second-guess a settlement when onw has not participated in the litigation. Missing for review are defendants arguments and plaintiffs discovered weaknesses, if any. Nevertheless, based on the above preliminary analysis,  an investor with large losses that stands a good chance of increasing recovery against Tyco and other defendants if it opts-out of the settlement. Comments and criticism of this analysis can only be helpful.

The Stoneridge Case and the Solicitor General

Link: Reed Kathrein's Website.

A CALL TO ACTION ON BEHALF OF INVESTORS

     Paul Silver, Assistant Attorney General,Counsel to the Washington State Investment Board has informed me of the following:

     In the Stoneridge case, despite the SEC voting to support investor victims, the Solicitor General let the June 11 deadline pass without filing an amicus brief in support of petitioners in the Supreme Court. 

     The next deadline in the case is August 15, by which time amicus parties supporting the defendants must file.   

     Many investors hope and urge that the Solicitor General will not file a brief on behalf of defendants. Also, a number of individuals and institutions are contacting individual legislators and others who have influence with the administration asking them to encourage the Solicitor General, once having passed on their opportunity to support the victims, at least to stay neutral and not support the defendants.

     Attached is information about the current status of the suit filed by Enron shareholders against the banks that orchestrated the Enron fraud. Attached are the following:

* Background information on the status of the case.

* Key news articles and op-eds.

<<Amicus Curious How Quickly They Forget, Financial Week 061807>>

<<Where Is Washington's Love for Shareholders, NY Times, 062407>>

<<Second Betrayal, Houston Chronicle 061607>>

<<Defend Main St., Not Wall St., LA Times, 053007>>

<<Holding Accomplices Accountable, NY Times, 051307>>

<<President weighed in on case, AP 061307>>

<<Stuff Happens at Justice, Washington Post 061307>>

* Brief filed recently by former SEC Chairs Arthur Levitt and William Donaldson and former SEC Commissioner Harvey Goldschmidt in support of the plaintiffs in the Stoneridge case.

Also, the following are links to the Amici briefs in Stoneridge case:

* Stoneridge plaintiff's brief:

www.universityofcalifornia.edu/news/enron/stoneridgeplaintiff.pdf

* University of California :

www.universityofcalifornia.edu/news/enron/stoneridgeamicus-uc.pdf

* States' Attorneys General:

www.universityofcalifornia.edu/news/enron/stoneridgeamicus-ag.pdf

* North American Securities Administrators Association:

www.universityofcalifornia.edu/news/enron/stoneridgeamicus-nasaa.pdf

* Council of Institutional Investors:

www.universityofcalifornia.edu/news/enron/stoneridgeamicus-cii.pdf

* Leading academic experts:

www.universityofcalifornia.edu/news/enron/stoneridgeamicus-experts.pdf

* Labor organizations:

www.universityofcalifornia.edu/news/enron/stoneridgeamicus-labor.pdf

* States of Arkansas, New Jersey and Rhode Island, and

pension funds in New York, Pennsylvania and Michigan:

www.universityofcalifornia.edu/news/enron/stoneridgeamicus-arkansas.pdf

* New York State Teachers Retirement System et al.:

www.universityofcalifornia.edu/news/enron/stonridgeamicus-nystrs.pdf

* Los Angeles Co. Employees Retirement Association et al.:

www.universityofcalifornia.edu/news/enron/stonridgeamicus-lacera.pdf

* AARP, U.S. PIRG and Consumer Federation of America:

www.universityofcalifornia.edu/news/enron/stoneridgeamicus-aarp.pdf

* American Association for Justice:

www.universityofcalifornia.edu/news/enron/stoneridgeamicus-aaj.pdf

Banbridge_Town_F.C.

In another clear victory for those who would see our jury system destroyed, the Supreme Court has sided with investment banks saying they cannot be held liable for violating time worn princples of the antitrust laws. The Court rejected even the Solicitor General's suggestion that the plaintiffs be allowed to amend:

Link: Justices Back Underwriters on New Issues - New York Times.

Justices Back Underwriters on New Issues

By LINDA GREENHOUSE Published: June 19, 2007

WASHINGTON, June 18 — The securities industry dodged a bullet on Monday when the Supreme Court threw out a private antitrust suit that accused 10 leading investment banks of conspiring to fix prices for the initial public offerings of hundreds of technology companies during the 1990s. Skip to next paragraph Related Supreme Court Opinion (pdf)The conduct described in the lawsuit, which included forming underwriting syndicates, setting the price for the initial offering and allocating shares to investors, was “central to the proper functioning of well-regulated capital markets” and “essential to the successful marketing of an I.P.O.,” the court said in an opinion by Justice Stephen G. Breyer. Opening investment banks to potential antitrust liability for behavior that the securities laws permit would make underwriters subject to “conflicting guidance, requirements, duties, privileges, or standards of conduct,” Justice Breyer said, and “would threaten serious harm to the efficient functioning of the securities markets.”

The vote in the case, Credit Suisse Securities v. Billing, No. 05-1157, was 7 to 1, with Justice Clarence Thomas dissenting and Justice Anthony M. Kennedy not participating. Justice Kennedy’s son, Gregory, is a managing director of Credit Suisse Securities, a defendant in the suit. Justice John Paul Stevens filed a separate concurring opinion and did not sign Justice Breyer’s majority opinion.

The closely watched class-action lawsuit was filed in 2002 by 60 investors who had lost money in technology stocks after prices dropped sharply. The decision overturned a ruling by the United States Court of Appeals for the Second Circuit, which in 2005 reinstated the lawsuit after the Federal District Court in Manhattan dismissed it....

The losers in the case included not only the plaintiffs but the United States, which in a brief filed by Solicitor General Paul D. Clement tried to sell an awkward compromise between the competing views of two federal agencies. The Justice Department’s antitrust division wanted to support the plaintiffs, while the Securities and Exchange Commission supported the defendants in arguing for immunity from the antitrust laws.

The government told the justices that neither of the two lower courts had “adequately accommodated the interests of the two critical statutory frameworks at issue.” While the court of appeals decision “fails to provide adequate protection for the securities laws’ policy of encouraging certain types of collaborative activity,” the solicitor general’s brief said, the lawsuit should not be dismissed; rather, the plaintiffs should be permitted to refine their complaint and resubmit the case.

Justice Breyer said the government’s position “does not convincingly address the concerns we have set forth here,” namely “the difficulty of drawing a complex, sinuous line separating securities-permitted from securities-forbidden conduct.” The line should be drawn by experts and not by juries, Justice Breyer said.

A main theme of the opinion was that to permit juries rather than expert regulators “to distinguish what is forbidden from what is allowed” in the context of securities underwriting would be to invite “unusually serious mistakes,” different outcomes in different courts for the same conduct. Justice Breyer said such inconsistency and unpredictability would result in over-deterrence of “syndicate practices important in the marketing of new issues.” Successful plaintiffs in antitrust suits win triple damages.

Justice Stevens, in his separate concurring opinion, criticized this analysis. Justice Stevens said that rather than focus on whether the securities and antitrust laws were compatible or incompatible, the court should simply have ruled that the defendants’ underwriting practices were not an antitrust violation.

“After the initial purchase, the prices of newly issued stocks or bonds are determined by competition among the vast multitude of other securities traded in a free market,” Justice Stevens said, adding, “To suggest that an underwriting syndicate can restrain trade in that market by manipulating the terms of I.P.O.’s is frivolous.”

In his dissenting opinion, Justice Thomas said that the securities laws, when properly understood, preserved the ability to seek remedies under other laws, like the antitrust laws.

Justice Breyer said the court had rejected that analysis in previous decisions.

Wall Street welcomed the news. “This decision is very important because it reaffirms the primacy of the S.E.C. in supervising the I.P.O. process,” said Stephen M. Shapiro, a partner at Mayer, Brown, Rowe & Maw who tried the case for the defendants. “The trial lawyers tried to make an antitrust issue out of a securities issue and the court said no.”

The plaintiffs in this case described several practices that they claimed were anticompetitive, including soliciting promises from prospective purchasers to buy more shares after the initial offering at higher prices, or to buy stock in other companies in exchange for being allocated more shares of the new issue. The result, the plaintiffs contended, was to inflate the commissions earned by the underwriters.

Justice Breyer said that the challenged practices “lie at the very heart of the securities marketing enterprise,” over which the S.E.C. “has continuously exercised its legal authority.” To the extent that underwriters cross the line, he said, it is a line that is often ambiguous and that the S.E.C. is in the best position to define and enforce. Because “securities law and antitrust law are clearly incompatible” in this context, Justice Breyer concluded, antitrust law had to give way.

Cox Hard to Figure Out

In a recent article by Bloomberg, we see that Chris Cox is a complicated and often unpredictable regulator who has drifted from his legislative roots. See http://www.bloomberg.com/apps/news?pid=20601103&sid=ax1WWAMfrL6A&refer=us .This is a maturity one can respect.

....

SEC Chief Cox, Seeking Consensus, Draws Fire From Both Sides

By Jesse Westbrook and Otis Bilodeau

June 18 (Bloomberg) -- U.S. Securities and Exchange Commission Chairman Christopher Cox, entering his third year as head of the nation's top market regulator, says he's trying to strike a balance between protecting investors and keeping American companies competitive.

``There's no question that regulation has benefits; it also has costs,'' he said in a June 15 interview in New York. ``The job of the regulator at all times is to make sure that the equation works out in favor of investors and markets.''

That approach is a departure from Cox's predecessor, William Donaldson, who riled business groups by voting with Democrats on the panel to impose record fines and ram through new rules on hedge funds and mutual funds. Yet it's also drawing heat from SEC constituents on both sides.

Cox, 54, a Republican nominated by President George W. Bush, in February came under fire from shareholder advocates including the Consumer Federation of America after the SEC backed efforts to thwart an investor lawsuit at the Supreme Court. Then earlier this month, Cox caught flak from the other side when he angered the U.S. Chamber of Commerce by urging the solicitor general to side with shareholders in a securities- fraud case.

``This is a guy who looks at problems from many different angles and proceeds cautiously after considering the consequences of each step,'' said former SEC general counsel David Becker, now in private practice. ``You can't just look at one or two considerations and from that predict how Cox is going to act.''

Frank Holds Hearing

House Financial Services Committee Chairman Barney Frank, who has scheduled a hearing this month to examine the agency and will hear from all five SEC commissioners, praises Cox, a former congressman.

``Chris Cox understands the difference between being a legislator on the one hand and being a law-enforcement officer on the other,'' said Frank, a Democratic representative from Massachusetts who has been quick to criticize regulators he considers lax. ``He appreciates the role he is playing as a law- enforcement officer in interpreting the law instead of a legislator who can change the law.''

After months of accusations by shareholder advocates that he favors business over investors, Cox recently has taken steps to push for company fines and punish compensation abuses. He also joined the SEC's two Democrats in calling on the solicitor general to back shareholders who are trying to sue two companies for helping a third commit fraud. Cox's deciding vote overruled the agency's other two Republican commissioners.

`Controversy-Free Zone'

Since arriving at the SEC, Cox mostly has avoided partisan rifts, pressing for unanimous decisions in every public vote on rules and regulatory proposals, in contrast to Donaldson, another Republican.

Cox said he has worked to create ``a very collegial atmosphere'' on the commission. Still, ``when so much money and so much responsibility is at stake, it's hard to imagine a controversy-free zone,'' he said in the interview.

``The purpose of consulting with my fellow commissioners is to get a better quality result, it's not to dumb down the result,'' he said. ``If I ever stopped gaining useful information that I thought was improving the product, that's the time to blow the whistle and say we're done talking.''

Cox's efforts aren't producing a consensus with Bush administration policy makers: The Treasury Department recently signaled in a letter to the Justice Department that it was at odds with the SEC over the Supreme Court case involving third- party securities fraud. Treasury Secretary Henry Paulson, former chief of Goldman Sachs Group Inc., has argued the cost of shareholder suits may be driving U.S. companies overseas.

Paulson's Campaign

Paulson, 61, has led a campaign to make the U.S. legal and regulatory frameworks less burdensome on companies, at times stepping on the SEC's turf. Last month, he said he would form a committee led by former SEC Chairman Arthur Levitt and former SEC Chief Accountant Donald Nicolaisen to study the accounting industry.

Cox, who served in Congress for 17 years representing California, also is facing critics from the states, including the attorneys general from Ohio and Utah. They complained that he has restrained the SEC enforcement unit and advocated limits on shareholder litigation.

The state officials were critical of the SEC's position on a shareholder lawsuit before the Supreme Court that accuses Tellabs Inc., a Naperville, Illinois-based phone-equipment maker, of making false business projections. That suit hinges on whether cases should be dismissed unless plaintiffs can prove executives knew they were deliberately providing false information. The SEC said it would lower the bar for shareholder suits, leading to more frivolous litigation.

Enforcement Crackdown

At the same time, Cox has stepped up the agency's pace of enforcement.

On May 31, the SEC announced the first corporate fines in a probe of stock-option backdating that has ensnared more than 100 companies. Cox pushed through the penalties against Brocade Communications Systems Inc. and Mercury Interactive Corp., ending a months-long dispute among the five commissioners over how to punish companies that falsified the dates of option grants to inflate their value.

Republican Commissioners Paul Atkins and Kathleen Casey had questioned whether the companies benefited from the misconduct. Democratic Commissioner Roel Campos has typically supported corporate fines on the grounds they deter fraud. Atkins declined to comment. Casey, Campos and Annette Nazareth, another Democrat, didn't return phone calls seeking comment.

Fines Over Fraud

The SEC also decided last month to seek a fine from Nortel Networks Corp. for accounting fraud, in the first test of a new policy that requires staff lawyers to obtain approval from commissioners before negotiating corporate penalties.

Cox authorized the staff to extract a fine from Toronto- based Nortel within a set range that tops out at less than $100 million, a person familiar with the matter said on June 8.

Critics including former SEC Chairman Levitt had argued that the new policy might undermine the enforcement unit. Levitt is a board member of Bloomberg LP, the parent of Bloomberg News.

Levitt said last week he doesn't think the Nortel case is ``terribly significant'' in showing how the new enforcement policy will work. ``It's one case,'' he said.

Rejecting the SEC

Solicitor General Paul Clement, who argues government cases before the Supreme Court, declined to follow the SEC's advice to back shareholders in the securities-fraud case involving St. Louis-based Charter Communications Inc. The investor suit at issue accuses Motorola Inc. and Cisco Systems Inc.'s Scientific Atlanta unit of helping Charter inflate its revenue.

The Bush administration voiced concern that so-called third-party lawsuits -- those targeting a company's business partners -- would harm the U.S. economy.

In a June 9 editorial, the Wall Street Journal said Cox's decision was ``a shocker, given that few people have campaigned more against frivolous securities lawsuits than the former California congressman.''

During his tenure on Capitol Hill, Cox helped draft a law making it tougher for shareholders to mount suits.

If the Supreme Court adopts the SEC's view of the case, other companies may be sued for unwittingly participating in transactions with businesses that were later deemed fraudulent, said Peter Wallison, a White House counsel to former President Ronald Reagan.

`Very Disappointing'

Cox's position ``is very disappointing,'' said Wallison, now a fellow at the Washington-based American Enterprise Institute. ``We are trying to attract companies to our markets. The danger of class-action lawsuits is very severe.''

Until now, Cox has tended to hold off on bringing contentious matters to the commission table for a vote. The 3-2 vote on the Supreme Court recommendation indicates Cox is becoming more willing to go out on his own, said Harvey Goldschmid, a former SEC commissioner.

``It's of considerable significance,'' said Goldschmid, now a law professor at Columbia University in New York. ``While it would be ideal to have all five commissioners voting together on an issue, it is of far greater importance to do the right thing.''

To contact the reporters on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net ; Otis Bilodeau in Washington at obilodeau@bloomberg.net .