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Can the Securities and Exchange Commission be an effective collection agency? That question, long asked by some congressional critics, has become even more pressing as the agency steps up its efforts to retrieve ill-gotten gains from securities law violators. In its 2002 annual report, released this winter, the SEC said that it won disgorgement orders adding up to $1.3 billion last year, a big jump over 2001′s total of $478 million. Under the agency’s rules, virtually all of that money is supposed to be returned to the investors who were bilked by corrupt executives, exploited by insider traders, or misled by stock analysts. SEC officials say that recent corporate scandals have made their mission even more crucial, and they’ve asked Congress for expanded recovery powers. Several former skeptics are now backing the agency’s requests. But some securities lawyers still say that the SEC is overextending itself. Defendants, Low Recovery Rates Skeptics can certainly find support from the SEC’s own statistics. Of the $1.3 billion that courts ordered returned in 2002, the agency has only gathered $57 million so far, according to an SEC spokesman. It’s a familiar problem for the agency. In a report issued last year, the General Accounting Office calculated that between 1995 and 2001, the SEC had collected a mere 14 percent of the funds it had targeted. To be sure, that figure includes money the agency would never be able to recover because, for example, the would-be payer is insolvent. Still, the GAO suggested � and the SEC acknowledges � that the collection rate could be higher. For the notoriously short-staffed and thinly funded SEC, the practical challenges of chasing down disgorgement proceeds have proved formidable. A study released by the agency this past January spells out the probblems. Some deadbeat defendants evade collections for years, forcing SEC staff to pursue additional litigation. Other defendants squander their assets and ultimately pay only a fraction of the judgments obtained against them. When the SEC does succeed in collecting disgorgement funds, the process of doling them out to wronged investors can be expensive and time-consuming. In some cases, the SEC enforcement staff asks a court to appoint a receiver � typically a private lawyer nominated by the agency � to oversee a distribution plan. The receiver can face considerable obstacles, notes SEC enforcement lawyer Paul Berger. In cases involving insider trading over an extended period of time, the receiver may be forced to trace millions of individual stock trades in order to identify every investor who was harmed. In other disgorgement proceedings, receivers may oversee the sale of assets in order to generate cash to compensate fraud victims. In either case, the receiver’s fees are deducted from the collected disgorgement funds. Sometimes the fees have been steep. In its report last year, the GAO cited a case in which a receiver who negotiated the sale of oil and gas interests was paid approximately $11.6 million, while investors ultimately received around $10 million. Despite its mixed record, the SEC argues that the recent increase in defrauded investors means that its collection powers should be increased. Appearing before a House panel in February, SEC enforcement chief Stephen Cutler asked for legislation that would allow outside lawyers to be hired as collection agents. Cutler also suggested that Congress pass a law making it easier for the SEC to sidestep various state laws that protect some personal assets � such as a primary residence � from seizure. Right Agency For The Job? Some former skeptics within Congress now seem eager to support the SEC’s disgorgement campaign. Representative Paul Kanjorski of Pennsylvania was one of three House Democrats who asked the GAO to examine the SEC last year. But he now says he will support legislation to expand the agency’s authority. “I think [the SEC's] suggestions and proposals were excellent,” Kanjorski says. Securities experts say they worry about the agency taking on too much responsibility, however. William McLucas, a former SEC enforcement director now at Wilmer, Cutler & Pickering, is one of the skeptics. It’s a mistake, he says, to believe “that the SEC can be or should be a collections agency,” he explains. McLucas adds, “[The SEC] does not have the staff, the enormous resources, or the tradition of doing what the IRS does, and it shouldn’t try.”

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