Risk & Compliance

SEC Unit Eyes Swifter Fraud Payouts

Phoenix, a new computer system, should simplify tracking, collecting, and distributing billions of dollars of penalties, says Chairman Cox in his b...
Sarah JohnsonMarch 27, 2007

The Securities and Exchange Commission is creating a new office dedicated to disbursing money to investors harmed in securities-fraud cases.

Under the Sarbanes-Oxley Act of 2002, the SEC became the fund holder for the disgorgement and fines it collects in such cases. While the regulator has done a good job of collecting and putting aside the cash, it has fallen behind with getting the money back to harmed investors, according to SEC chairman Christopher Cox. On Tuesday, Cox acknowledged that “too much money is still undisbursed.”

The commission has struggled in identifying claimants and keeping track of the funds, according to Cox. As a result, the SEC is creating the new office and a new computer system, he said during a Congressional appropriations meeting where he discussed President Bush’s proposed $905 million allotment for the SEC’s 2008 budget.

Cox blamed the delay of fund payouts on the “complexities of the process.” But the SEC’s new computer system, called Phoenix, should simplify matters by tracking, collecting, and distributing the billions of dollars collected in penalties, he said. Distributing the funds involves abundant court approvals, announcements to shareholders who may want to make claims on the funds, and decisions about how the money should be divvied up.

In 2002, Sarbox’s “Fair Funds” provision required the SEC to return money to investors victimized by securities fraud. Previously, disgorgements and penalties were deposited into a U.S. Treasury general fund. In perhaps its thorniest fair funds case, the SEC is still working on the distribution of money to investors harmed by the WorldCom scandal. The former telecom giant paid the SEC its largest-ever fine of $750 million three years ago.

Last October, the regulator announced that $150 million of that money would be doled out to investors, with the rest earmarked for eventual full disbursement. At the time, the SEC said investors in 110 countries made nearly 450,000 claims on the WorldCom fair fund and that the claims were tied 9.4 million securities transactions. Cox says that the SEC is planning do a better job of consolidating funds from related cases into a single distribution.

As of 2005, the SEC had disbursed money to wronged investors in “only a few cases,” Cox testified. In fact, the Government Accountability Office criticized the SEC that year for its slow process for disbursing the more than $4.8 billion in disgorgement and penalties it had collected during the previous three years. The GAO noted that the SEC had diligently applied the Fair Funds provision in 75 cases and collecting that money for the majority of those cases. But it also noted that only the investors in three of those cases had received any money.

On Tuesday, Cox said the SEC has gotten better at distributing money from the fair funds. In the past two years, more than $1 billion has been disbursed to investors, including those who had had invested in Global Analysts Research, Hartford, and Bristol-Meyers Squibb. The SEC plans to announce several large disbursements soon, Cox added.

Still, the SEC has learned that disbursing the money requires full-time work and a dedicated staff. “The creation of this specialized function within the SEC will ensure that investors’ money is returned as quickly as possible, while minimizing the costs of distribution,” Cox said. The SEC is also working with the Bureau of Public Debt to invest disgorgement and penalty funds in interest-bearing accounts, Cox added.

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