November 13, 2002
The Honorable Harvey L. Pitt The Honorable David M. Walker Dear Messrs. Pitt and Walker: We are writing to follow up on the General Accounting Office (GAO) report, SEC Enforcement: More Actions Needed to Improve Oversight of Disgorgement Collections (GAO-02-771, July 12, 2002), which was prepared at our request. That report found that Securities and Exchange Commission (SEC) efforts to recover illegal gains from financial fraudsters had fallen drastically – to roughly 14 percent of the $3.1 billion that wrongdoers had been ordered to return in cases from 1995 to 2001 – and required tougher oversight. As is clear from the SEC’s October 2, 2002, letter responding to GAO’s recommendations (enclosed), the primary impediment to improving collection and tracking of disgorgement payments is lack of resources. We commend the SEC for the actions it has taken to address the serious shortcomings in this important investor protection program and for its willingness to explore contracting with outside firms as a means to enhancing collection efforts. The SEC letter notes, however, that "these efforts will be an enormous undertaking with limited staff resources" and goes on to state that:
The SEC is underfunded, understaffed, and overwhelmed, as was amply documented in the GAO’s report, SEC Operations: Increased Workload Creates Challenges (GAO-02-302), in March of this year. It desperately needs more funds to staunch its high staff turnover, hire and train additional staff, modernize its antiquated computer systems, and fund the startup costs of the new accounting oversight board. When President Bush signed the Sarbanes-Oxley Act, which included a $776 million budget for the SEC, he said: "This law authorizes new funding for investigators and technology at the Securities and Exchange Commission to uncover wrongdoing. Corporate misdeeds will be found and will be punished." We observe that an essential part of uncovering and punishing wrongdoing is returning funds to harmed investors. Subsequent press reports, "Bush Tries to Shrink S.E.C. Raise Intended for Corporate Cleanup," New York Times, Saturday, October 19, 2002, at A1; "New Oversight Panel Awaits Budget Resolution," Wall Street Journal, Monday, October 21, 2002, at A2; and "Under Pressure from Democrats, Bush Offers to Increase SEC Budget," Wall Street Journal, Wednesday, October 23, 2002, at A6, indicate that the Bush Administration is reneging on its commitment to the funding levels in Sarbanes-Oxley. Investors deserve far better than this. To help ensure that the SEC’s disgorgement program receives the resources and attention that it deserves, we request that the GAO monitor developments relating to the collection and distribution of disgorgement funds and conduct a follow-up study covering the following areas: First, we request that GAO examine the actions taken or planned by the SEC, the adequacy of those actions, and the need for any further measures to enhance the agency’s collection efforts. Second, Section 308 (Fair Funds For Investors) of the Sarbanes-Oxley Act provides that, on the motion or at the direction of the SEC, the amount of any civil penalty may be added to and become part of any disgorgement fund for the relief of victims, in any judicial or administrative action brought by the SEC under the securities laws (enclosure). Section 308(c) requires the SEC to conduct a study of relevant enforcement actions and methods, and to submit a report to Congress by January 27, 2003, on measures needed to "more efficiently, effectively, and fairly provide restitution to injured investors." GAO’s follow-up report should examine the findings and recommendations of this report, and, to the extent possible, look at the impact of subsections (a) and (b) of section 308 on investor recoveries. Third, we request that GAO’s follow-up report look into whether the SEC’s budget for fiscal year 2003 includes sufficient funding for adequate staff and computer resources and other necessary means to better ensure the return of monies to defrauded investors. We appreciate your cooperation and attention to this important investor protection issue. Sincerely, JOHN D. DINGELLRANKING MEMBER COMMITTEE ON ENERGY AND COMMERCE JOHN J. LAFALCE PAUL E. KANJORSKI Enclosures cc: The Honorable W. J. "Billy" Tauzin, Chairman The Honorable Michael G. Oxley, Chairman
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