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For bitter stock market investors, the Securities and Exchange Commission’s most recent annual report seems to offer some consolation. The SEC won judicial rulings ordering securities law violators to repay a total of $1.3 billion in ill-gotten gains in 2002. That’s a giant leap over the prior year: In 2001, the number was $478 million. Under SEC rules, virtually all of that money is supposed to be returned to the investors who were bilked by fraudsters, exploited by insider traders, or misled by stock analysts. In the wake of recent corporate scandals, Congress has broadened the SEC’s power to go after money for investors, and the agency itself is aiming to pursue wrongdoers more aggressively. It won’t be easy. Obtaining disgorgement orders and collecting the cash turn out to be very different things: Of the $1.3 billion in orders in 2002, the agency has actually gathered only $57 million so far, according to an SEC spokesman. In fact, the SEC’s handling of disgorgement cases has been the subject of considerable criticism from congressional investigators over the past decade. And now some securities law experts are questioning whether the agency is well-equipped to serve as the market’s Robin Hood. “If the processes can be set up effectively, then it does make sense” for the SEC to play a larger role in the effort to return money to injured investors, says Dixie Johnson, head of the securities practice in the Washington, D.C. office of Fried, Frank, Harris, Shriver & Jacobson. “But does the track record suggest that this is something we should take comfort in?” The track record is mixed, at best. In 1994, the General Accounting Office issued a report that sharply criticized the ad hoc approach to disgorgement cases within the agency. And this past July, a second GAO report calculated that between 1995 and 2001, the agency had collected a mere 14 percent of the funds it had targeted. For sure, the report noted, the 14 percent figure understates the SEC’s actual success, since the calculation included amounts the agency would never be able to recover because, for example, the would-be payer is insolvent. Still, the report suggested — and the SEC itself acknowledges — that the collection rate could be higher. The same 2002 GAO report also faulted the agency for failing to track how much money was ultimately distributed. Data on disgorgement funds “available to investors” are scattered among “case files that are manually maintained,” the GAO report observed. “SEC staff could not tell us how much of the disgorgement collected was paid to investors or to the Treasury.” In a July 2002 letter responding to the GAO, Stephen Cutler, chief of the SEC’s Enforcement Division, discounted the significance of the low collection rate, given that “many large judgments are uncollectible from the time they are entered.” But Cutler assured the GAO that the SEC was “issuing new guidelines for collections and establishing new systems for tracking collections and distributions.” Those systems remain a work in progress, however. In response to written questions about the amount of disgorged funds returned to investors, an SEC spokesman says, “We have never tracked that number.” Jane McKown, the chief counsel to the SEC’s Enforcement Division, explains that she is laboring with technology staff at the agency to create a more effective mechanism for monitoring the disgorgement process. “We are working to improve our systems and improve collections,” she says. For the notoriously short-staffed and thinly funded SEC, the practical challenges of chasing down disgorgement proceeds have proved formidable. A Jan. 23 study by the commission spells out how some deadbeat defendants evade collections for years, forcing SEC staff to pursue additional litigation, while other defendants dissipate their assets and ultimately pay only a fraction of the judgments obtained against them. In a welter of litigation stemming from accounting fraud at consumer electronics retailer Crazy Eddie Inc., the SEC from 1989 to 1997 chased tens of millions of dollars in insider trading proceeds sheltered outside the United States by Eddie Antar himself. The agency’s enforcement staff fought to recover the assets in suits brought in England, Lichtenstein and Switzerland, among other countries. “Even though the commission and Crazy Eddie’s trustee brought actions in six countries to recover approximately $64 million,” the SEC’s Cutler told a House panel in February, “millions of dollars remain unaccounted for.” When the SEC does succeed in collecting disgorgement funds, the process of doling them out to injured investors can be expensive and time-consuming. In some cases, the SEC enforcement staff asks the court to appoint a receiver — typically a private lawyer nominated by the agency — to oversee a distribution plan. In cases involving insider trading over an extended period of time, explains Paul Berger, an SEC enforcement lawyer, such plans may require the receiver 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 return to victims of fraud. In either type of case, the receiver’s fees are deducted from the collected disgorgement funds. In a few instances identified by the GAO in its 2002 report, these fees have been steep. The GAO cites one 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.” The SEC is now pressing Congress to increase the agency’s ability to capture assets for injured investors. In February, SEC enforcement chief Cutler urged a House panel to offer legislation that would authorize the SEC to hire outside lawyers 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 to satisfy legal judgments. Even former skeptics within Congress now seem eager to support the SEC’s disgorgement campaign. Rep. Paul Kanjorski, D-Pa., who, along with two other House Democrats, asked the GAO to examine the SEC’s disgorgement processes last year, says he will support legislation to expand the agency’s authority in this area. “I would not be in favor of starting an additional agency or bureaucracy” to handle collection and distribution of ill-gotten gains, says Kanjorski. “I think [the SEC's] suggestions and proposals were excellent.” But securities experts say they worry about the agency taking on too much responsibility for returning money to investors who get burned. “I think it’s a mistake for the SEC — or for the Hill or the public — to go down this road toward believing that the SEC can be or should be a collections agency,” says William McLucas, a D.C. partner at Wilmer, Cutler & Pickering and former SEC director of enforcement. “This is an agency that does not have the staff, the enormous resources, or the tradition of doing what the IRS does, and it shouldn’t try.” If the SEC gets too caught up chasing “50 cents on the dollar” after the law has been broken, McLucas suggests, there’s a risk that the agency’s resources could be diverted from efforts to prevent or halt ongoing misconduct.

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