WASHINGTON -- Rep. Christopher Cox, a Republican who represents Orange County, Calif., plans to introduce legislation early next year to subject municipal bond issuers to the same disclosure requirements as corporate issuers, possibly including registration.
"I haven't written the bill yet," Cox said in an interview yesterday. "But the object is very much in focus. I'm going to move to require the same disclosure to a 'T' that is required of corporate issuers," said Cox, who will give up seats on the House Budget and Government Operations committees for a seat on the Energy and Commerce Committee.
Cox, a former securities and corporate finance lawyer with Latham & Watkins in Newport Beach, Calif., said municipal issuers have far fewer disclosure requirements than corporate issuers, which must register their debt offerings with the Securities and Exchange Commission.
"There is no reason that the disclosure rules should be so substantially different," given that many of the same investors buy both corporate and municipal bonds, he said.
Meanwhile, the Teamsters union levied new charges that Michael Stamenson, a Merrill Lynch & Co. employee who reportedly handled the firm's account with Orange County, may have violated the Municipal Securities Rulemaking Board's political contributions rule when his fiance contributed to the election campaign of Robert Citron, the former county treasurer.
County records of campaign contributions show that Cathie A. Lewis, a self-described housewife with an address of 1973 #B Ascot Dr. in Moraga, Calif., made a $1000 contribution to Citron on June 13, the same day as Stamenson. Lewis married Stamenson on Sept. 10, listing her occupation as an unemployed hostess and her address as the same as Stamenson's, 51 Merrill Circle, according to a copy of the marriage certificate released by the Teamsters.
The MSRB's political contributions rule, which took effect last April generally bars broker-dealers that contribute to issuer clients from doing any business with those issuer clients for two years afterward. The rule covers any employees that solicit municipal business and also forbids indirect contributions.
Merrill, which underwrote at least $775 million of municipal bonds for Orange County after Stamenson and two other employees contributed to Citron's campaign, has insisted those employees are not covered by the rule.
Cox indicated yesterday that his concerns about the lack of adequate disclosure requirements for municipal issuers stem in part from Citron's reelection campaign and Cox's discovery that federal securities laws did not require Citron to make disclosures regarding his investment strategy for the county's multibillion dollar investment portfolio.
"If disclosures had been made in the Orange County situation to the investing public at large, Bob Citron never would have gotten away with any of this," he said in the interview yesterday.
Cox chaired the campaign of Citron's opponent, John Moorlach, an accountant with Balser, Horowitz, Frank & Wakeling, who repeatedly charged that Citron was engaging in risky investment strategies.
"The entire campaign was based on Bob Citron's investment strategy. We got 700 pages of documents from Mr. Citron but he refused to disclose the portfolio, even to someone running against him, even though this is all taxpayer money and the entirety of the job is your investment strategy," said Cox.
Cox said he has already discussed possible legislation with SEC chairman Arthur Levitt and that he will work with the SEC to draft the bill he plans to introduce very early next year.
"I will move swiftly to harmonize the disclosure rules for municipalities with those of corporate issuers," he said.
Cox said also that he and Rep. Jack Fields, D-Tex., the incoming chairman of the Energy and Commerce subcommittee on telecommunications and finance, will hold hearings on the Orange County fiasco early next year.
Cox disputed charges that securities litigation reform proposals that he and others have drafted would hinder investors from filing lawsuits against Citron, other county officials, or Merrill Lynch.
"That's just flat out wrong," he said. "Misrepresentation and nondisclosure are the heart of securities fraud [charges] and arguably there is a significant amount of misrepresentation and nondisclosure to go around in the Orange County fiasco," he said. Those standards are "amply broad to cover what may have gone on in the Orange County situation," he said.
Cox has drafted a securities litigation reform bill that was incorporated into the House Republican leadership's Contract With America. The bill is expected to be the centerpiece of a litigation reform measure that the Republicans hope to push through the House within the first 100 days of Congress' session next year.
Cox and other proponents of the reform proposals say they are needed to stem a growing tide of frivolous lawsuits that typically benefit lawyers more than the plaintiffs.
"We want to pass legislation that does away with litigation abuses," said one key Republican congressional aide.
But critics say these so-called reforms will have a chilling effect on investor lawsuits like those filed last week after Orange County filed for bankruptcy.
The proposed reforms would, among other things, require the losing party in a lawsuit to pay the legal bills of its opponent and set higher standards for investors to meet in trying to prove they were defrauded.
"They would absolutely devastate the Orange County lawsuits," said Jonathan W. Cuneo, a lawyer with the Cuneo group that represents some 100 law firms across the Nation that specialize in securities litigation.
Rep. Barbara Boxer, D-Calif., said yesterday that the litigation reform proposals would make it difficult for investors and Orange County to file suits over the county's losses.
"It would be a fraud-doers protection bill," said one lawyer who did not want to be identified. "They want to put the risk of fraud on the investors and not on the fraud-doers."
At least two class action lawsuits filed on behalf of investors in a federal court in Orange County last week charge Citron, other county officials and Merrill Lynch with securities fraud for failing to fully disclose the risks and losses affecting the county's investment pool.
The suits, which were both filed in the U.S. District Court for the Central District of California, charge that Orange County bondholders have and will suffer substantial losses because of the events that led to Orange County's bankruptcy filing.
One of the suits was filed on behalf of investors by Bernstein Litowitz Berger & Grossman, the firm that represented investors in litigation in the lawsuits filed over the Washington Public Power Supply System's bond defaults.
"We recovered over $800 million for bondholders. But we could never able to do that under these proposals," said Daniel Berger, a lawyer with the firm.
PSA-Indexed Municipal Swap RatesTerm Dealer Receives PSA Index Dealer Pays PSA Index(Years) & Pays Fixed Rate of: & Receives Fixed Rate of:2 5.43% 5.53%3 5.52 5.624 5.55 5.655 5.59 5.697 5.60 5.7110 5.63 5.75
Rates are representative midmorning interdealer swap prices on Dec. 12 using a quarterly net interest payment and weekly reset structure. The PSA Index in effect on that date was 2.95%.
Source: Euro Brokers Maxcor Inc.