[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
____________________________________________________________________________
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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

                              ----------                              
                                                                   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.]


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