SEC Seeks Way to Fund Itself to Boost Probes : Money From Registration Fees Is One Possibility
The government’s $650-million securities fraud settlement with Drexel Burnham Lambert Inc. set a record, but none of that money will help finance the agency responsible for policing Wall Street.
Under federal law, the Securities and Exchange Commission cannot touch a penny from the Drexel case--or any of the other millions it has raised for the U.S. Treasury in a wave of fraud and insider trading scandals.
But with attention focused on cases in New York and Chicago and federal officials pledging to strengthen securities enforcement nationwide, a move is afoot to bolster an agency that this year is receiving less than the U.S. military bands.
“Even if our resources were doubled, we’d still have to make decisions on what suspicious circumstances to investigate,” Gary Lynch, the SEC’s enforcement director, said Wednesday.
‘We Are Getting Hurt’
“The problem at the moment is that over the last two to three years we got involved in some important investigations--cases like Dennis B. Levine, Ivan F. Boesky, Drexel--which required the devotion of our resources,” he said. “Obviously, we’re not going to take staff away from ongoing litigation. But right now we are getting hurt.”
The three Wall Street fraud cases Lynch mentioned all produced mammoth settlements.
Under Drexel’s plea agreement with the SEC made public last month, the investment giant must pay $300 million in criminal fines and civil penalties. The remaining $350 million is to be placed in an escrow account to cover payments to investors who may sue to recover losses from Drexel’s actions.
Levine, a former Drexel managing director, in June, 1986, agreed to repay $11.6 million in illegal gains from insider trading, the use of non-public information to profit in stock transactions.
Cooperation by Levine led the SEC to Boesky, the now-imprisoned speculator who in November, 1986, agreed to pay $100 million in insider trading penalties.
$121 Million in Profits
In fiscal 1987, the SEC obtained court orders for defendants to return about $121 million in illicit profits. More than $70 million of that came from insider trading cases. Another $62.6 million was ordered in civil penalties for insider trading.
No one publicly has suggested allowing the SEC to use the money it rakes in for government coffers, which would make the agency something like a meter maid for securities investigations.
“It’s a real problem because you don’t want the agency that is going to be using the fines to have an incentive to fine people,” said Stanley Sporkin, a U.S. District Court judge in Washington who was the SEC’s enforcement director from 1974 to 1981.
Under longstanding guidelines, the SEC has required violators of federal securities laws to “disgorge,” or return, illicit profits.
As the number of insider trading cases grew, the SEC pressed for and Congress enacted the Insider Trading Sanctions Act of 1984, which empowered the commission to seek court-ordered fines in addition to disgorgement.
Power to Levy Fines Urged
Sporkin said the SEC also should be authorized to levy fines for relatively minor infractions, rather than just being able to suspend guilty brokers. Under current guidelines, only judges in civil and criminal cases can fine securities-law violators.
For this fiscal year, the SEC is budgeted to receive $142.6 million, up from $135.2 million in fiscal 1987. The military bands, meanwhile, will get $167.5 million.
The commission’s revenue from securities registration fees for the year is projected at $252 million--nearly twice the budget--but, as with penalties, the SEC cannot spend a cent of it.
That is where change is expected. SEC Chairman David S. Ruder, who took over in August, 1987, has proposed that the commission adopt some form of self-funding, such as retaining part of its fees.
Ruder told a House panel that the SEC may have allowed some investigations--including enforcement of fraud in “penny stocks,” which are traded over the counter for a few dollars or less--to slip because of under-funding and understaffing.
Support From Congressman
“Given the current inadequacies of the SEC’s resources, (self-funding) makes admirable good sense and I’ll be working toward that end,” Rep. John D. Dingell (D-Mich.), chairman of the oversight and investigations subcommittee of the House Energy and Commerce Committee, said Wednesday.
A recent SEC report said that the annual turnover rate for staff attorneys is 20% and that half of SEC lawyers have fewer than three years’ experience. The starting salary for commission lawyers is $27,172.
After the Drexel case and a two-year probe of Chicago’s commodities markets, Atty. Gen. Dick Thornburgh this week announced formation of securities and commodities fraud task forces in six cities that will work in conjunction with the SEC.
