[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
IT'S ONLY FAIR: RETURNING MONEY
TO DEFRAUDED INVESTORS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE, AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON
FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
FEBRUARY 26, 2003
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-4
86-851 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice JULIA CARSON, Indiana
Chairman BRAD SHERMAN, California
RON PAUL, Texas GREGORY W. MEEKS, New York
PAUL E. GILLMOR, Ohio BARBARA LEE, California
JIM RYUN, Kansas JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois CHARLES A. GONZALEZ, Texas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
MARK GREEN, Wisconsin JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona MIKE ROSS, Arkansas
VITO FOSELLA, New York CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MELISSA A. HART, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
TOM FEENEY, Florida DAVID SCOTT, Georgia
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey
TIM MURPHY, Pennsylvania BERNARD SANDERS, Vermont
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises
RICHARD H. BAKER, Louisiana, Chairman
DOUG OSE, California, Vice Chairman PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware GREGORY W. MEEKS, New York
PETER T. KING, New York JAY INSLEE, Washington
FRANK D. LUCAS, Oklahoma DENNIS MOORE, Kansas
EDWARD R. ROYCE, California CHARLES A. GONZALEZ, Texas
DONALD A. MANZULLO, Illinois MICHAEL E. CAPUANO, Massachusetts
SUE W. KELLY, New York HAROLD E. FORD, Jr., Tennessee
ROBERT W. NEY, Ohio RUBEN HINOJOSA, Texas
JOHN B. SHADEGG, Arizona KEN LUCAS, Kentucky
JIM RYUN, Kansas JOSEPH CROWLEY, New York
VITO FOSSELLA, New York STEVE ISRAEL, New York
JUDY BIGGERT, Illinois MIKE ROSS, Arkansas
MARK GREEN, Wisconsin WM. LACY CLAY, Missouri
GARY G. MILLER, California CAROLYN McCARTHY, New York
PATRICK J. TOOMEY, Pennsylvania JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia JIM MATHESON, Utah
MELISSA A. HART, Pennsylvania STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota BRAD MILLER, North Carolina
PATRICK J. TIBERI, Ohio RAHM EMANUEL, Illinois
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
C O N T E N T S
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Page
Hearing held on:
February 26, 2003............................................ 1
Appendix:
February 26, 2003............................................ 21
WITNESS
February 26, 2003
Cutler, Stephen M., Director, Division of Enforcement, Securities
and Exchange Commission........................................ 5
APPENDIX
Prepared statements:
Emanuel, Hon. Rahm........................................... 22
Gillmor, Hon. Paul E......................................... 24
Kanjorski, Hon. Paul E....................................... 25
Royce, Hon. Edward R......................................... 27
Cutler, Stephen M............................................ 28
Additional Material Submitted for the Record
Cutler, Stephen M.:
Written response to a question from Hon. Vito Fossella....... 49
IT'S ONLY FAIR: RETURNING MONEY
TO DEFRAUDED INVESTORS
----------
Wednesday, February 26, 2003
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance,
And Government Sponsored Enterprises
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:02 a.m., in
Room 2128, Rayburn House Office Building, Hon. Richard Baker
[chairman of the subcommittee] presiding.
Present: Representatives Baker, Gillmor, Kelly, Biggert,
Green, Capito, Hart, Kennedy, Tiberi, Brown-Waite, Harris,
Renzi, Kanjorski, Meeks, Inslee, Moore, Lucas, Clay, McCarthy,
Baca, Matheson, Lynch and Scott.
Chairman Baker. [Presiding.] I would like to call this
meeting to order to discuss the Sarbanes-Oxley Act,
specifically section 308(c) which requested the agency to
study, evaluate and make appropriate recommendations with
regard to what is known as the Fair Fund contained in that
bill.
Before the passage of Sarbanes-Oxley, if the SEC was
engaged in pursuit of wrongdoers and in fact assessed penalties
for inappropriate conduct, those penalties would not directly
benefit any wronged investor, but would return to the U.S.
Treasury. With the passage of the Fair Fund, we have now
created a mechanism where disgorgements, that is the return of
ill-gotten gains, or penalties assessed now will be funneled
into the Fair Fund for what is determined to be appropriate
allocation to those who were victims of the wrongdoing.
I have been particularly stunned by the actions of some
prominent enforcement authorities, not within the SEC, in their
diligence in pursuit of those who have committed acts that are
inappropriate. Specifically, taken from one web page, the
statement, "The money that was being abused, the money that was
lost, the money of people like you who took their pension
money, their 401(k)s, their IRAs, the money they had set aside
for their kid's college education or a mortgage payment or
their vacation, that was the money being used and violated by
those on Wall Street who thought they were beyond the reach of
the law." I am with him all the way to that point. It is just
the next step that bothers me. When the award was finally
settled, he kept the money. I likened it to the call to the
sheriff's office when you report your car stolen, the sheriff
calls you back two days later and says, "Good news, we found
the car; bad news is, I am keeping it." I find this vindication
something less than whole.
So this is a new first step and effort to try to provide
governmental assistance to individuals who have been defrauded
that is meaningful. This is a first effort, and recognizing
that, I have reviewed the report of the SEC and find it very
constructive, and will after listening to further explanation
this morning construct legislation, which I am hopeful other
members of the committee will find of interest, for
introduction soon, that will address those areas that the
report identifies, as well as some other areas that I have
found to be of importance, to move forward and make the Fair
Fund more meaningful to more investors across the country. I
think this is a very good start, and I am appreciative to the
agency for their hard work and effectiveness in making the
legislative concept an operating reality.
Mr. Kanjorski, do you have an opening statement?
Mr. Kanjorski. Thank you, Mr. Chairman.
We meet today to examine the issue of investor restitution,
an issue of great importance to me. Last month, the Federal
Reserve determined that the United States stock ownership
increased to 51.9 percent in 2001. Because more and more
Americans continue to make investments in our securities
markets, we have an obligation to ensure that these individuals
are appropriately safeguarded in cases of wrongdoing.
Accordingly, I have made investor protection one of my
priorities for work on our committee. Last year, in the wake of
a tidal wave of cases of corporate wrongdoing, we worked to
enact into law the Sarbanes-Oxley Act. This law advanced
investor protection in a number of important ways, including
the creation of the Fair Fund. The Fair Fund, as you know,
allows the Securities and Exchange Commission to further help
the victims of securities law violations by permitting the
agency to add any civil penalties collected in enforcement
cases to its disgorgement orders.
However, in order for the Fair Fund to work well, serving
as a deterrent and as a means of returning funds to harmed
investors, we must ensure that the SEC has an effective program
that to the maximum extent possible collects the fines,
penalties and disgorgements it orders. As you know, Mr.
Chairman, I have been a leader in the congressional effort to
examine these issues in recent years. In March, 2001, for
example, I joined with a number of my Democratic colleagues in
ordering an investigation by the General Accounting Office of
the SEC's disgorgement policies. Last July, the GAO determined
that the SEC's efforts to recover illegal gains from financial
scam artists had fallen dramatically and required tougher
oversight. Between 1995 and 2001, the SEC collected roughly
$426 million or about 14 percent of the $3.1 billion owed in
disgorgement cases. This finding represented a sharp drop from
the 50 percent collection rate the GAO previously found in
1994. As a result, I call upon the SEC to tighten its
disgorgement collection monitoring and to implement other
oversight improvements.
In recent years, the GAO has also examined the success of
securities regulators in collecting fines and penalties. In the
next few months, I expect to receive a follow-up report from
the GAO regarding this issue. A previous GAO report completed
in July, 2001, determined that these collection rates have
generally improved in recent years, but that more improvements
can be made. The SEC, for example, now collects about 91
percent of assessed penalties and fines, an increase from the
83 percent in a similar GAO study in 1998. Despite this
improvement, the GAO found that the SEC could take steps to
enhance the collection of fines referred to the Treasury
Department's Financial Management Service under the Debt
Collection Improvement Act of 1996.
When we hear from our distinguished witness later today, I
hope that he will address this important issue. The effective
implementation of the Fair Fund in improving disgorgement and
fine collection practices are important efforts to ensure that
investors receive at least partial compensation for losses they
incur as a result of securities fraud. However, the most
meaningful route for investors to receive restitution for their
losses is through private litigation. We need to ensure that
investors harmed by corporate wrongdoers can seek legal redress
in our nation's courts.
Accordingly, I was particularly pleased to read the SEC's
report to Congress about the benefits of private litigation. As
the SEC notes, investor lawsuits complement government
enforcement action by providing a mechanism to compensate
investors through the award of restitution or damages. While
the SEC's enforcement actions often have several aims, the
objective of private litigation is exclusively to compensate
injured investors. In this report, the SEC also refers a number
of recommendations for improving the effectiveness of the Fair
Fund. For example, the SEC calls for legislation to exclude
securities cases from state law property exemptions, such as
homestead exemptions. The SEC additionally suggests that we
amend the Fair Fund law to permit the agency to use penalty
monies ordered in a particular matter for distribution to
injured investors regardless of whether disgorgement was
ordered. These ideas have merit and we should work to address
them.
In closing, Mr. Chairman, I look forward to hearing from
our witness on the issue of investor restitution. I also look
forward to hopefully working with you to examine and adopt the
legislative recommendations offered by the SEC in the weeks and
months ahead.
Thank you, Mr. Chairman.
Chairman Baker. I thank the gentleman for his comments.
Ms. Kelly, did you have a statement?
Mrs. Kelly. Thank you, Mr. Chairman, Mr. Kanjorski. I want
to thank you for holding this hearing this morning.
It is a pretty simple principle we are talking about here.
People who were damaged deserve to get some money back. If we
can make them whole, so much the better. That is the whole
principle that we put behind the Fair Fund last year. That was
a significant step in the right direction. By establishing that
fund, we said that wrongdoers are going to be punished and that
every effort is to be made to make the people who have been
victimized whole.
What is important now, I think, is that we understand how
our direction is being implemented, and make sure that it is
being implemented in a way that fully meets the expectations of
Congress when we put the Fair Fund Act in place.
I think it is imperative that the Commission have the tools
that it needs to protect investors, and it is my hope that this
hearing will shed some light on whether or not the Fair Fund
Act gives the Commission sufficient ability to collect payments
and then disburse funds back to the harmed investors. If any
modifications are needed, I hope that we can reach an agreement
in a timely fashion and in a manner that maintains the strong
focus we have in the Fair Act of directing funds back to the
harmed investors. That is the top priority.
I expect through the testimony of you, Mr. Cutler, that we
can all gain a better perspective and a better understanding of
what the Commission's efforts and perspectives are in
implementing the Fair Act. I think strengthening investor
confidence through a strong protection in this way has got to
be something that the investors understand, and it is clearly
something that is needed in the markets today. The
implementation of the Fair Fund Act is absolutely essential to
that confidence.
I want to thank you, Mr. Cutler, for being here today. I
very much look forward to your testimony, I hope it will help
us get in the direction that we hoped to accomplish when we
passed the Fair Act.
Thank you, Mr. Chairman. I yield back.
Chairman Baker. Thank you, Ms. Kelly.
Mr. Scott, did you have a statement this morning?
Mr. Scott. No.
Chairman Baker. Mr. Lynch?
Mr. Lynch. No, thank you.
Chairman Baker. Ms. McCarthy?
Mrs. McCarthy of New York. No, sir.
Chairman Baker. Does any member have a further statement?
Mr. Renzi?
Mr. Renzi. Thank you, Mr. Chairman.
Mr. Cutler, I also want to thank you for coming today and
for your testimony that we are about to hear. I am really
specifically interested in the concept of debt collection
focusing on the company itself, and not so much the individual.
I realize in looking at the statistics and reading them last
night that there has been very little success in going after
individuals who defrauded investors. I would ask you to please
look at the model that we see in our own military, where
generals are called on the carpet after years and years of
service. They are reprimanded and their pay and retirement is
taken away from them. Now, it is easier because the government
of the United States controls the flow of money, but it is also
because we direct our focus to the DOD and to the agency.
So in your testimony and in your discussions today I hope
you will talk about the possibility of our law stretching
further than just the individual, but the possibility of it
including the ability to go after the company itself who pays
out the golden parachute to that individual, and the
responsibility for the excessiveness in that golden parachute,
so that we are going after two entities, not just one.
Thank you, sir.
Chairman Baker. Thank you, Mr. Renzi.
Does any other member have an opening statement? If not, at
this time I would like to call on our only witness today for
this hearing, Mr. Stephen Cutler, who is the Director of the
Division of Enforcement for the Securities and Exchange
Commission. Welcome, Mr. Cutler.
STATEMENT OF STEPHEN M. CUTLER, DIRECTOR, DIVISION OF
ENFORCEMENT, U.S. SECURITIES AND EXCHANGE Commission
Mr. Cutler. Thank you, Mr. Chairman.
Chairman Baker, Ranking Member Kanjorski, and distinguished
members of the subcommittee, good morning. I am pleased to be
here today to testify on behalf of the Securities and Exchange
Commission. I commend you for inviting me here and I commend
the subcommittee for holding a hearing on the important and
timely issue of returning funds to investors.
Clearly, this is a topic of mutual concern to the
subcommittee and the SEC. Today you asked that I discuss the
following matters: first, the principal findings and
legislative recommendations in the Commission's report pursuant
to section 308(c) of the Sarbanes-Oxley Act of 2002; second,
the Fair Fund provision in the Sarbanes-Oxley Act; third, the
difficulties the Commission encounters in collecting
disgorgement; fourth, the Commission's efforts to improve the
effectiveness of its collection program and return more money
to defrauded investors.
I will touch on each of these subjects briefly, but I
request that my more extensive written statement be included in
the record.
Chairman Baker. Without objection.
Mr. Cutler. Thank you, sir.
On July 30, 2002, President Bush signed into law the
Sarbanes-Oxley Act of 2002. A particularly novel provision of
the act that should benefit investors significantly is the Fair
Fund provision, section 308(a). The Commission receives
payments from wrongdoers in the form of disgorgement and civil
money penalties. While the Commission has always been empowered
to distribute payments of disgorgement to harmed investors in
appropriate circumstances, prior to Sarbanes-Oxley, the
Commission was required by law to transmit penalty amounts to
the Department of the Treasury. Penalty amounts could not be
paid to harmed investors.
Now, as a result of the Fair Fund provision, in Commission
actions where both disgorgement and penalties are obtained
against a defendant or a respondent, the amount of the penalty
may be added to the disgorgement fund for the benefit of
victims of the violation. Within the first six months of the
enactment of Sarbanes-Oxley, the Commission has authorized the
Division of Enforcement at the SEC to seek approval of Fair
Fund distributions on more than a dozen occasions.
Section 308(c) of Sarbanes-Oxley required the Commission to
review its enforcement actions over the previous five years to
determine how such proceedings may be best utilized to provide
recompense to injured investors. The principal findings of the
Commission study were set forth in a report submitted to
Congress on January 24 of this year. The report found that
significant payments or the failure to make such payments by a
small number of defendants has a disproportionate impact on the
Commission's overall collection success. Emergency actions,
where appropriate, can limit investor losses and increase the
chances of returning funds to investors in almost all types of
cases, particularly when the Commission receives early notice
of the misconduct.
The appointment of a receiver, where appropriate, can
enhance the Commission's ability to maximize investor recovery.
The Commission's historic practice of allocating defendants'
payments first to disgorgement and then to penalties has
produced results within prior statutory restrictions consistent
with the principle on which the Fair Fund provision is based,
that is that all monies recovered in Commission actions be made
available to compensate the victims of securities fraud.
Now, I want to briefly describe the Commission's collection
process and some of the difficulties the Commission encounters
in collecting disgorgement and penalty amounts. When an SEC
defendant or respondent fails to pay disgorgement or penalty
amounts owed in a timely manner, there are two primary means by
which the Commission staff collects judgments, through the
efforts of Commission enforcement attorneys, which we call in-
house collection, and through referrals to the Department of
the Treasury.
In-house collection may involve litigation or non-
litigation efforts, including contempt actions, asset
foreclosures, and wage garnishments. Treasury administers two
collection programs in which the Commission participates. The
first, called the Treasury offset program or TOP, is a
centralized process that matches and offsets certain federal
payments such as tax rebates, against debts owed to the
government. The other program is Treasury's collection services
program. In this program, Treasury employs traditional
collection agency services.
As described in the Commission's report, there are a number
of factors that hinder our ability to collect money judgments
owed by securities law violators, whether through in-house or
outside means. First, substantial recovery of the fraudulent
proceeds is often not possible because the violators have spent
investors' money to bring in more investor money. Second,
wrongdoers often hide assets, for instance in overseas
accounts, to hinder collection efforts. Nevertheless, in
appropriate circumstances, the Commission expends significant
resources tracking down hidden assets and compelling defendants
to satisfy monetary judgments.
Third, in many cases the Commission or criminal authorities
may obtain remedies that contribute to defendants' inability to
pay amounts owed. For example, the Commission can obtain an
order barring a defendant from serving as an officer or
director of a public company, or an order barring an respondent
from associating with a broker or dealer. Criminal authorities
may prosecute defendants and obtain jail sentences. These
measures may limit or even eliminate an individual's employment
opportunities and thus reduce defendants' ability to pay.
In the last year, the Commission has taken a number of
steps to enhance its collection program. We have developed
written guidelines for staff on how to pursue collections,
established a collection tracking system, and designated
collection monitors to oversee the collection program in each
of our regional and district offices. Additionally, the
Commission created and filled a position for an attorney
dedicated solely to collections. We believe that these measures
are improving the Commission's ability to collect on judgments,
within the constraints I mentioned previously, and to monitor
the effectiveness of our collection program.
Now, I want to briefly describe the legislative proposals
recommended by the Commission to enhance our collection
activities and strengthen the Commission's enforcement program.
As I noted earlier, the Fair Fund provision changed the law to
permit penalty amounts collected to be added to disgorgement
funds in certain circumstances. However, there is a technical
limitation in the wording of the Fair Fund provision that only
permits the Commission to add penalty amounts to disgorgement
funds when a penalty is collected from the same defendant who
has been ordered to pay disgorgement. This limitation means
that in certain cases, penalties collected from defendants may
not be distributed for the benefit of harmed investors.
The Commission recommends making technical amendments to
the Fair Fund provision to permit the Commission to use penalty
monies for distribution funds in these additional
circumstances.
Recommendation two relates to removing certain state law
impediments to Commission collection efforts. All states have
statutes that exempt certain property, such as a primary
residence, from collection by creditors, including the SEC.
Some defendants use these exemptions to buy lavish homes, and
thus shelter their assets from collection. Currently when
trying to collect disgorgement, the Commission staff faces the
prospect of protracted litigation to overcome state law
exemptions.
Accordingly, the Commission recommends that Congress enact
legislation to remove state law impediments such as the
homestead exemption to the Commission's debt collection
efforts.
The Commission's third recommendation would enhance our
ability to collect funds in litigation. Currently, the
Commission can contract only for non-litigation collection
services. If a private attorney does not have the direct and
timely ability to invoke litigation during the collection
process, however, it can dramatically lower the opportunity for
success. The Commission recommends legislation to expressly
authorize the Commission to hire private attorneys to conduct
collection litigation, just as the Department of Justice is
able to do.
The remaining recommendations I will discuss relate to
strengthening the Commission's enforcement power generally, and
thus can lead to greater success in returning funds to
defrauded investors. First, in order to avoid duplication and
increase efficiency, the Commission recommends authorizing the
Department of Justice, subject to judicial approval in each
case, to share grand jury information with the Commission staff
in more circumstances and at an earlier stage than is currently
permissible. This proposed modification of the grand jury
secrecy rule would be modeled on the law that currently applies
to bank and thrift regulators.
Second, also to help the Commission's enforcement staff
gather information more efficiently, the Commission recommends
that Congress amend the securities laws to allow persons or
entities who produce privileged or otherwise protected material
to the Commission to do so without fear that by virtue of such
production alone, they would be deemed to have waived the
privilege or protection as to anyone else.
Third, to increase the effectiveness and decrease the
expense of SEC litigation, the Commission recommends
legislation to make nationwide service of trial subpoenas
available in the Commission's civil actions filed in federal
district court. Under current law when witnesses are located
outside of a district court's subpoena range and fail to
volunteer to appear at trial, the staff must take the witness'
depositions and then use those depositions at trial. Such
deposition testimony is more expensive and less effective than
live testimony.
The fourth and final Commission recommendation I will
discuss was not previously included in the Commission's reports
to Congress. The Commission recommends that Congress amend the
federal securities laws to authorize the Commission to impose
civil money penalties in additional cease and desist
proceedings. Currently, the Commission has two primary means of
seeking civil penalties, in administrative proceedings against
entities and persons directly regulated by the Commission, or
in federal court actions against any entity or person. The
Commission also has the authority to seek remedies other than
civil penalties against an entity or person in an
administrative proceeding.
The result of this patchwork is that in some circumstances,
the Commission must file two separate actions against the same
entity or individual to obtain the appropriate array of relief.
Moreover, under current law, if the Commission charges a
respondent with causing another party's violation of the
securities laws, a concept similar to aiding and abetting in a
cease and desist proceeding, the Commission can impose a
monetary penalty only in very limited circumstances. By
granting the Commission additional authority to seek penalties
in cease and desist proceedings, Congress would eliminate
inefficiency, give the Commission added flexibility to proceed
administratively, and strengthen the Commission's ability to
hold those who assist in violating the securities laws
financially accountable for their action.
In conclusion, the Commission is dedicated to improving its
collections record and providing greater recovery to defrauded
investors. We look forward to working with this subcommittee on
additional measures to further these important goals. I would
be pleased to answer any questions any of the members may have.
Thank you.
[The prepared statement of Stephen M. Cutler can be found
on page 49 in the appendix.]
Chairman Baker. Thank you, Mr. Cutler. For the record, I
will incorporate all of the recommendations of the SEC report
into legislation, which we hope to have prepared for next week.
I would just make the statement for members interested, if they
have interest in being involved with that matter, please let
our office know.
There are a couple of issues that are circling around the
construction of the Fair Fund. One is with regard to, or at
least alleged complexity of the distribution of assets to
wronged investors. Isn't it the case that in prior years the
SEC has on many occasions with the result of disgorgements
identified a class of wronged investors and made distributions
in previous reconciliations of events of this sort?
Mr. Cutler. The short answer to that question is yes, on
numerous occasions.
Chairman Baker. So the short answer to the complexity issue
is, you have done it, we know how to do it, and that should not
stand in our way of moving forward with these collections.
Mr. Cutler. I agree with you.
Chairman Baker. Secondly, with regard to staffing
allocations, my understanding is the SEC generally has about
3,000 employees, but I do not know how many are allocated to
the Division of Enforcement.
Mr. Cutler. It is approximately 1,000 people nationwide,
that is spread out over 12 offices, with approximately 375
people in Washington and the balance in 11 offices located
throughout the country.
Chairman Baker. And primarily those would be seeking out
wrongdoers, to differentiate that from the collection side, how
many folks are actually in the business of pursuing return of
assets?
Mr. Cutler. The way we are structured currently, Mr.
Chairman, is to have the members of the staff who are
investigating and litigating our cases also pursuing the
judgments in connection with those cases. Recently, we hired a
collections expert, someone who is steeped in collections law,
which is much different, as you know, from the federal
securities laws and requires a different sort of expertise, to
spearhead our collection efforts. Certainly, with increased
staffing that I think the current budget contemplates, we are
grappling with whether we ought to expand the group of people
that we have who really devote all of their time exclusively to
collection efforts.
Chairman Baker. Let me help on that point. At the current
time, if the award or penalty is small in relation to the
number of investors and it is not practical to make a
meaningful distribution, money still is returned to the
treasury, as opposed to being used internally. It would be my
recommendation in the bill we are to consider to have a
structured requirement that first every effort be made for
investor restitution; secondly, that funding for investor
education be at its optimal level; and thirdly, that any
residual funds remaining after penalties, disgorgement or other
activities that net income to the agency, then be utilized for
additional collection services within the agency.
I understand the professional concern about the outward
appearance of incentivizing people to go after wrongdoers for
their personal gain or the growth of the agency, but if we
structure it in such a fashion where it first must go to the
investor, secondly goes to education purposes, and then only if
all those needs are met, would it wind up in the hands of the
collection services, it seems to me to be appropriate,
especially in light of the section of the report which
identified the need to contract with outside services for
litigation and/or collection purposes. One of the limiting
factors to engage in that is resources to supervise it.
I will make it as hard as I can for you to answer this
wrong. Would you object to inclusion of that approach in
legislation the Congress might carefully consider?
Mr. Cutler. Let me say first, Mr. Chairman, I so appreciate
the support and the sentiment of that notion. I think we should
be making every effort, and with your help and the
subcommittee's help, we have been and will continue to make
efforts to return money to investors. Certainly, we can use all
of the budget help that we can get, and I think this Congress
and this subcommittee have been instrumental in that regard.
Chairman Baker. Well, you are a unique regulator. Every
other one I have read about in recent weeks has not only
collected, they have kept it all and not given any back to the
investor. At least we are starting with the premise that we are
going to give it back to the investor, then we are going to
educate investors, and only then would we keep the money for
the purposes of helping other wronged investors.
I find it especially troubling when I read the papers where
a particular state government is going to use the proposed, not
yet received settlement figures, to build a DMV office. Maybe
that is because we want to catch the guys in the cars as they
are leaving the state with your money. I do not know what the
connection is to wronged investors, but we really have to get a
handle on this.
Mr. Kanjorski?
Mr. Kanjorski. Thank you, Mr. Chairman.
Mr. Cutler, in the report on page 19 and 20, it talks about
the benefits of private litigation. Let me read a few sentences
to you; "Private litigation, however, offers the dual benefit
of compensating Commission enforcement action and providing a
mechanism to compensate investors through the award of
restitution of damages. In contrast to Commission enforcement
actions which have several aims, the aim of private litigation
is solely to compensate injured investors. The ability of
investors to fully recover their losses, indeed, may largely
depend on the use of private actions."
In other words, the Fair Fund and the disgorgement actions
are well and good as far as they go, but the most meaningful
route for investors to receive restitution for their losses is
through private lawsuits. Is that correct?
Mr. Cutler. Yes, sir. I think it is clearly the primary
goal of law enforcement and civil law enforcement to deprive a
wrongdoer of ill-gotten gains. I think the brilliance of the
Fair Fund provision is that it takes that goal and does not do
anything to diminish it, but at the same time I think satisfies
another goal, which is to try to get as much money as possible
back to the harmed investors, but it is certainly not the only
means of doing that. Private litigation is an important part of
the landscape in the federal securities law area.
Mr. Kanjorski. As you know, in 1994 in the case of Central
Bank of Denver, the Supreme Court ruled that private parties
cannot recover damages from aiders and abettors of fraud, such
as the accounting firms and investment banks that assist in
perpetuating frauds. Soon after this ruling, the Congress
restored aiding and abetting liability for the SEC, but not for
private litigants. The report on aiding and abetting liability
that the SEC submitted to our committee says that from a period
of January 1, 1998 until December 31, 2001, the SEC concluded
enforcement actions including against aiding and abetting
actions over 1,700 securities professionals.
My question is, given your acknowledgement that private
lawsuits are really the place that investors should look to
recoup their losses, does it make sense not to allow those
investors to sue aiders and abettors just like the SEC can? And
wouldn't that help us achieve our goal of full recovery for
victims of securities fraud?
Mr. Cutler. I have not studied the issue of the impact of
eliminating aiding and abetting liability in private actions. I
will say that my sense of where our judicial system is going is
to expand the concept of liability such that the division
between aiding and abetting and primary liability has become
less important. I think the primary example I can think of in
that regard is Judge Harmon's decision in the Enron matter in
Texas, where she refused to dismiss the case against a number
of defendants who had argued that essentially the claim was
another way of stating an aiding and abetting claim, as opposed
to a primary claim. She rejected that motion on the part of
those defendants.
Mr. Kanjorski. Don't you think that Central Bank of Denver
would have to be reversed by the court for that to stand up?
Mr. Cutler. I think it would be imprudent of me to comment
on what a court might do with respect to Judge Harmon's ruling.
The Commission, if my recollection is correct, filed an amicus
brief in support of the plaintiffs in that Enron matter and I
believe that Judge Harmon could decide to refuse to dismiss
that case, which is what she did.
Mr. Kanjorski. Since the Congress has restored aiding and
abetting to the SEC, why can't we in this legislation just
restore across the board to investors, too, in private
lawsuits?
Mr. Cutler. You certainly could. I do not think the agency
has taken a position, and I do not think it has done a study of
the impact of the aiding and abetting provision.
Mr. Kanjorski. Can you get us some information on that?
Mr. Cutler. We can try to do that.
Mr. Kanjorski. I appreciate that.
One other thing, Mr. Chairman, before I relinquish my time,
if you do contract out, how are we going to be certain that
there is not a good old boys club on the assignment of these
cases? Are they going to be pursued in some way through, I know
it is very difficult to bid out professional services. Are you
going to use contingency fees or are you going to pay hourly
rates?
Mr. Cutler. Let me grapple with the second question first,
the method of payment. I think most firms in this area do work
on contingency, but the fact is since we have not gotten the
authority yet, we have not really thought about whether it
makes more sense to pursue one form of payment over another. In
terms of making sure that there is not a good old boy network
in connection with who is selected to pursue a judgment, we are
subject to and we go through whenever we contract with outside
parties, a very rigorous process to make sure that it is done
fairly and equitably, and that the best party to do the job is
selected to do the job. I know that we are committed to ensure
that happens here if we get the authority to go ahead.
Mr. Kanjorski. There is some feeling on the Hill about
contingency fees. That is part of the problem and the need for
tort reform, so you have to be very careful. This is going to
be an issue that some of my friends on the other side of the
aisle do not believe in contingency fees, that they are
inherently bad. So you have to be very careful how you tread on
that.
Mr. Cutler. I am sure we will be careful, sir.
Chairman Baker. Ms. Kelly?
Mrs. Kelly. Thank you, Mr. Chairman.
Mr. Cutler, there is a well known fact that civil lawsuits
take forever, and this may not be the best way for us to return
people's money. There is one other thing. A single agency
working with the authority can freeze money before it goes
offshore. Those are just a couple of things to think about as
you address some of the concerns that Mr. Kanjorski has raised.
I think that the points need to be thought through and
certainly I know that this committee would work with you to try
to speed the recovery and the redistribution of ill-gotten
gains by some of the people. That is what the Fair Fund Act is
all about.
I wanted to ask you another question as well. It seems to
me that our governmental agencies do not work with each other
very well. You have asked authority to have the Department of
Justice share grand jury information. When you are thinking
about contracting out, would it not be helpful to you to
perhaps work with the DOJ, and if there is a suit that has to
be run, run the civil and criminal suits together, your agency
and the DOJ. It seems to me that would streamline the process
and get to where we in Congress are interested, and that is get
the money and get it back to the people. Do you want to comment
on that?
Mr. Cutler. Sure, Representative Kelly. We do try very hard
to coordinate what it is that we are doing on the civil side
with what our criminal law enforcement counterparts are doing
on the criminal side. Yesterday, as you may know, we announced
an action against eight executives and employees of Qwest
Communications, at the same time that the Department of Justice
announced criminal indictments against four of those employees.
I do think it is critical that we do everything we can to
leverage the government's resources to go after the wrongdoers
as aggressively as we can.
I think the reason why we have proposed lifting some of the
restrictions on grand jury information is I think it would help
us to be able to coordinate those actions in a way that is much
more efficient and makes much more sense. As of right now, if
our criminal law enforcement authority counterparts proceed
through a grand jury, we will not have access to that
information. Just earlier this week, we held a two-day
conference at the SEC in order to train some of our criminal
law enforcement counterparts, including members of U.S.
attorneys offices around the country, FBI agents and others, on
securities law issues that come up in the criminal law context.
It is an issue where we have tried to be very sensitive to the
coordination.
Mrs. Kelly. I am specifically thinking right now about the
Enron case, where there were members of the boards of directors
there that also participated in enriching themselves at the
price of costing their investors. I would hope that in a case
like that, there would be a case to get after those people
through not only civil, but also criminal suits. It would be I
think important that we force those people to recognize their
fiduciary responsibility as being board members. We have laws
on the books that are bringing them to a criminal, there are
criminal penalties attached there, I believe. If you need some
support there, please let us know because we have got to try to
get this money back to people, and that is the whole focus as I
see it of the Fair Fund Act.
Thank you, Mr. Chairman. I yield back.
Chairman Baker. Thank you, Ms. Kelly.
Mr. Scott, you are next on recognition.
Mr. Scott. Yes, Mr. Cutler, you had mentioned in your
testimony that you would like for Congress to exempt from the
security cases the states' homestead exemptions. Why is that,
and what examples, or what has been the extent of debtors using
or abusing the Homestead Exemption Act?
Mr. Cutler. It has certainly been the case, particularly
when it comes to disgorgement, we have been faced with
protracted litigation, or the prospect of protracted
litigation, in connection with homestead exemptions. I think we
have all seen photographs of some very lavish homes that have
been built by respondents and defendants in federal securities
law civil enforcement actions. While I do not have any
particular examples, we can provide those to you,
Representative Scott, of instances where we have sought
disgorgement, but we have been confronted with a homestead
exemption. I know that it happens with some frequency. What we
are trying to do is get as much money as we can back to
investors. The homestead exemption can really stand in the way.
Mr. Scott. I yield back.
Chairman Baker. Thank you, Mr. Scott.
Mr. Renzi?
Mr. Renzi. Thank you, Mr. Chairman.
Mr. Cutler, thank you for your report and your testimony,
and for fielding our questions. I appreciate you coming over
today with your staff.
I come out of Arizona, home to Charles Keating. I can
remember selling insurance out there in Arizona during those
days. We were trying to sell directors and officers insurance
to the banking industry. There was an old saying that came out
of the banking industry, which was that the fastest way to make
a good businessman a bad businessman was to lend him too much
money.
I recall trying to sell directors and officers insurance to
the thrift savings industry. If you recall back, that whole
debacle that we went through in those days, one of the
solutions we found was that the board of directors of the
thrifts and the savings could be held liable because of the
excessive payouts that they would make, for the excessive
loans, or the sweetheart deals that they would give to people
who came and borrowed money. I cannot help but draw the
correlation now between where we are in those days and where we
are now.
Although I very much compliment you for your report, I
notice we are focusing specifically on the defendants. I think
I gave you fair warning in the introduction, to ask you now,
shouldn't we look at the liability of the board of directors?
Shouldn't we be able to say that their fiduciary obligation
includes a personal responsibility to the investors that when
they pay out these golden parachutes and they provide these
excessive benefits at a time when the company's books or the
stocks are in question, is that truly sound? And should
corporate assets be also an area where we look for collection?
Could you also, a second part of my question, answer unintended
consequences by going after board members and corporation
assets?
Thank you, sir.
Mr. Cutler. That is an excellent question, Congressman.
This is an issue that we are very sensitive to. First, I should
say there is no financial reporting case that we investigate
where we do not look at the conduct of the board of directors.
Very recently the Commission sued Mr. Walsh, a Director of
Tyco, in connection with his actions relating to that company.
Again, I feel very strongly that we have to look at this
whenever there is a financial reporting failure on the part of
a public company.
In connection with efforts to ensure that companies do not
pay out money, when they have done something wrong, pay out
money to the wrongdoers; I think a good example of the
Commission's sensitivity to that issue is the WorldCom matter,
where the Commission went into court within 48 hours of
WorldCom's announcement of its accounting misstatements and
asked the court for an order freezing or prohibiting
extraordinary payments of money absent court approval. That is
something that the Sarbanes-Oxley Act also makes it much easier
for us to do. I think you can expect that we will use
opportunities in the future to take actions like that to ensure
that monies are not paid out to the wrongdoers or to the
alleged wrongdoers.
There have been other cases, I can tell you, where
companies, because of Sarbanes-Oxley, and because of what they
saw that we did in WorldCom, are much warier of paying out
money, paying out golden parachutes to someone that they have
severed ties with otherwise because of alleged wrongdoing.
Chairman Baker. Thank you, Mr. Renzi.
Mr. Lynch?
Mr. Lynch. Thank you, Mr. Chairman.
Mr. Cutler, I also want to thank you for coming here today
with your staff, and your willingness to testify and help the
committee with its work. I value the recommendations that you
have offered the committee. I agree that restitution is a noble
cause, and I think that given the history that we have heard
here earlier about the Enron case and WorldCom and others,
there has got to be a way that we can repair at least some of
the losses to investors.
I do want to go back to Mrs. Kelly's remarks, though. I
think that beyond restitution and beyond disgorgement, there is
also an inherent value in relentless enforcement of the law. It
goes beyond the ability to put all the money back into the
investor's pocket. It goes beyond extracting as much of the
ill-gotten gains from any of these individuals. It goes to the
very enforcement of the law for the purpose of protecting
values that we in this society have prioritized, if you will.
I noticed in your written testimony, although you
necessarily abbreviated your remarks, that you talk about, for
example, this Crazy Eddie case, the SEC versus Crazy Eddie.
Crazy Eddie apparently was not that crazy. He hid his money in
at least six different countries, and required us to try to get
as much back as possible. I am sure that there are many of his
creditors and investors who, even if presented with the reality
that it is very difficult to get that money back because he has
taken such time and lengths to conceal his assets, I think that
those investors and creditors would be well-served in knowing
that through your efforts and others, that Crazy Eddie would
never have a moment of peace. I think that it is the power of
example that we offer in the diligent and relentless pursuit of
justice that is a big part of your role.
So while I certainly understand from one standpoint your
concerns whether or not the efforts of prosecuting a
disgorgement action would actually pay for itself or the costs
of that disgorgement action would actually be justified with
the resulting distribution, I do not think that is the end of
the equation. I think that we can very much hope that future
behavior might be impacted on the way we handle these scandals,
and that it needs to go as far up the chain as possible. I know
that the chairman has mentioned about the board of trustees,
and others have mentioned about making sure we go to every
corner of the corporate structure in order to extract
restitution, disgorgement, or just plain justice. I just hope
that we do not make this a profit and loss analysis in
enforcing the law.
That is all I have, Mr. Cutler.
Mr. Cutler. I could not agree with you more, Representative
Lynch. I think it is critical that law enforcement work other
than on a profit and loss basis. That is why we did pursue
Eddie Antar to the corners of the globe. That is why we pursued
Robert Brennan, and that is why we pursued Paul Bilzerian. We
have a mission to protect investors, but also to achieve
deterrence. A very important part of that is that we send the
message loudly and clearly that we will pursue you; that we
will go after you if you have broken the law. This is not just
about how much money we can get back, and how much money we can
return to investors.
Mr. Lynch. Thank you.
Chairman Baker. The gentleman yields back?
Mr. Lynch. Yes, thank you.
Chairman Baker. Thank you, Mr. Lynch.
Ms. Biggert?
Mrs. Biggert. Thank you, Mr. Chairman.
Mr. Cutler, it seems like there is an awful lot of process
here that many parties are partaking in. My question involves
the states. I know you cannot divulge some of the details
concerning the enforcement actions, but some statements about
the global statement have talked about that only the federal
portion of the funds are potentially available to provide
investors with restitution. Do you know whether any states
intend to provide the restitution, or will the states simply
place the money in their treasuries?
Mr. Cutler. Representative, I am constrained about what I
can say in connection with the global settlement of the
research analyst matter. It has not yet been finalized or
approved by our Commission. I think I can say that at this
point I do not know whether any states intend to put any of the
money that they receive as a result of the settlement in a
distribution fund for investors.
Mrs. Biggert. Okay. Then you talk about how the Commission
needs to have people that are well aware of many different
jurisdictions; the State laws. And then later on, you talk
about having them do away with so many of the State law
impediments for the collection of judgments, and administrative
orders. Will the states still be involved, then, in this type
of litigation?
Mr. Cutler. Well, there certainly will still be state law
issues in connection with collection matters. Federal rule of
civil procedure 69 provides that it is the state law method of
collection that should be the basis for our efforts, even in
Federal court.
Mrs. Biggert. So you are not recommending changing--
Mr. Cutler. Well, it is something I think we should give
some thought to, Representative. I do not think we have done
enough thinking about that issue to date. As the law currently
stands, I know that state law expertise is something that is
very helpful in the collections area.
Mrs. Biggert. Thank you.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Ms. Biggert.
Mr. Meeks?
Mr. Meeks. Thank you, Mr. Chairman.
I am sorry I missed your testimony, so I hope that I am not
repeating anything that you might have said, but since there is
only a few of us here, then maybe for my edification you can
expound upon them.
The first, I was just wondering about the collections of
penalties. How much money in addition to the disgorgements
before penalties, how much additional money do you think that
put in the pots so that people can be reimbursed or for
restitution?
Mr. Cutler. Mr. Representative, that is so variable. When I
say that, I mean that it really depends on what kind of case
that we are bringing. Just by way of example, in this past year
we brought an action against Credit Suisse First Boston in
connection with their IPO allocation practices. In that case,
the penalty amount was $30 million. That is a significant
amount, but that is unusual and we do not have those every day.
Certainly, recently we have had some very large penalty
amounts. I think in that regard, it is very helpful that the
Fair Fund provision allows the government to put that money
toward investor recovery, as opposed to just paying it to the
treasury.
Chairman Baker. Would the gentleman yield on that point?
Mr. Meeks. Yes.
Chairman Baker. I would just like to point out, although
not yet agreed to, the potential global settlement of about
$1.4 billion, published reports indicate that about $900
million of that could be made available for investor
restitution, by far the largest amount potentially agreed to.
For what it is worth, of course I am very interested in seeing
that agreement move in that direction, not wanting to influence
anybody inappropriately, but I would hope that if we reach that
kind of agreement, that the investors would see that
significant assistance.
I thank the gentleman for yielding.
Mr. Meeks. The other thing, I have noticed in the report it
indicated that as far as collection is concerned, the lack of
resources and staff and personnel have something to do with the
hindrance of collections. I know that this committee has
recently appropriated more money. I was wondering, will that be
sufficient so that we can go and have better collections, with
reference to disgorgement funds?
Mr. Cutler. I think the recent budgetary measures will help
considerably. You always have to do a balancing. What resources
do you want to take away from pursuing ongoing securities fraud
and devote to the collection process? You have got to do that
balancing because it is important that we collect, because if
we do not, that diminishes the effectiveness of the enforcement
process overall. But I think given staffing levels that we can
anticipate as a result of Congress' recent budget action, I am
hoping that we can devote more resources to the collection
effort.
Mr. Meeks. Finally, my last question, and maybe you can
answer this, because I am still unclear in my own head, just
looking back at the entire root cause of the current issue,
whether or not the breakdown in investor safeguards, whether
that was initially a problem of sophisticated accounting
techniques that were fooling the auditors, or whether it was
collusion on the part of the auditing companies, just so we
could try to develop and focus on what the root causes are so
that we do not have to worry about going after the folks to
help individuals who have been defrauded.
What do you think the root causes were? How did we get into
this mess?
Mr. Cutler. It is such a complicated question, Mr.
Representative. There are so many causes, and I think academics
and others smarter than I are going to spend a lot of time
trying to figure out what all the causes are. Certainly there
have been systemic issues that I think Sarbanes-Oxley and some
of this subcommittee's efforts were designed to address
problems with the integrity of the reporting process;
incentives on management in connection with the financial
reporting process. The role of auditors is one that has to be
looked at very carefully. There are so many causes, and I am
not sure that I am the person to turn to. I think of my role as
going after the people who did it, and I think less about why
it has happened, and more about doing our job and going after
the people who caused the problem.
Mr. Meeks. I yield back, Mr. Chairman.
Chairman Baker. I thank the gentleman.
Mr. Inslee?
Mr. Inslee. Thank you.
I want to make sure I understand your answer about
contingency fees. I thought you said that you had not been
given authority for that, or maybe you can tell me what your
plan is on recoupment.
Mr. Cutler. One of our proposals is that we be given the
authority to outsource the collection efforts, the litigation
collection efforts. What we have not grappled with is how those
outside collection efforts would be paid for, that is, by
contingency fee or by other methodology.
Mr. Inslee. You do not need congressional approval to make
that position, do you?
Mr. Cutler. I do not believe so. What we do not have so far
is congressional approval to actually outsource the litigation
efforts.
Mr. Inslee. I see. Well, as just one person, I hope you do
consider contingency fees as an effective way to make sure you
have people working on viable cases. Contingency fees separate
viable from non-viable cases very effectively, because the
pursuer makes a decision very quickly whether it makes sense
economically or not. I think it makes sense for you to consider
that. I hope you will do that.
A second issue, you made reference to potentially giving
you the authority to get some grand jury information to you
quicker. You made reference to other scenarios where that is
done. Can we just graft those situations directly to your
situation at the SEC? Is there any difference we would have to
do in doing that? Do you have any guidance on that?
Mr. Cutler. I believe that is right. Why don't I after this
hearing is over confirm that, and we will get back to you Mr.
Congressman. I think that what we are looking for is something
comparable to what the banking regulators have in this regard.
Mr. Inslee. Great. I am Jay Inslee from the State of
Washington. If you can give me some of that information, I
would be happy to work with you on it.
Mr. Cutler. Thank you, sir.
Mr. Inslee. Thank you.
Chairman Baker. I have a follow-up question that I want to
revisit; the observation about the outside collection issue.
Quoting the report, setting aside for the moment whether it is
contingency by the hour or what the reimbursement methodology
might be, on page 32 of the report it says the Commission would
need additional staffing and technology expenditures to oversee
and audit such a program. So there is a resource limitation
issue as well, which returns me back to the original question
posed about funding at least, if we cannot feel comfortable
with SEC staff growth, it would seem to me to be very
defensible to have penalties that cannot be returned, penalties
that are not needed for investor education, at least go to the
program that is funded to oversee outside collection
activities, because that purely benefits the individuals who
have been wronged.
Given the committee members' comments, I think there is
considerable support for granting whatever authority we need to
grant. Maybe that is an approach we could pursue that would be
more professionally acceptable to the agency, if you do not
want to see the money come directly back to the agency for
funding additional staff personnel. Is that a potential area to
explore?
Mr. Cutler. I think so. I appreciate any effort to separate
out monies that would come to the agency or for the work of the
agency from our enforcement activities. As you mentioned, and I
think you are very sensitive to, Mr. Chairman, there is an
appearance issue when our staff pursues actions and as a result
of those actions can enhance our own coffers. I never want to
be accused of pursuing an enforcement action, pursuing a
collection action because it some way redounds to the agency's
benefit. So if there is any way to insulate our enforcement
activities from funding and fee issues, I think that is very
useful.
Chairman Baker. I do not want to diminish that attitude. It
is so rare. I certainly feel that I want to compliment the
agency for that obviously professional concern, because so many
are pursuing wrongdoers and keeping the money. But at this
juncture, there has got to be a way, given the repetitive
statements in the report where actions are limited because of
resource limitations to work this out. We will converse with
you over the next few weeks to try to figure out if there is a
methodology that makes professional conduct permissible.
I want to again express my appreciation to the agency,
since we have no further members for questions, for the good
work you have done, the timeliness of your report. I hope that
in perhaps some formal if necessary, but at least informal way,
we can get at least an annual report of dollars generated
through disgorgements and penalties that have been distributed,
not by individual name, but at least in categorical amounts,
how much has been returned to investors as a result of this new
activity, so we can assess our effectiveness and judge whether
additional modifications to the statute may be warranted.
We will certainly have legislation drafted for the agency's
review within the next few days and hope to be successful in
seeing its consideration in a very timely manner.
Again, thank you for your courtesies. Our meeting stands
adjourned.
[Whereupon, at 11:05 a.m., the subcommittee was adjourned.]
A P P E N D I X
February 26, 2003
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