Audit Finds SEC May Give Waivers Too Easily

The Securities and Exchange Commission is excusing too many violators of federal securities laws from returning illegal profits, the agency’s inspector general told Congress.

SEC Inspector General Walter Stachnik said the SEC is having a “significant problem” controlling its granting of waivers of legal judgments that order defendants to return ill-gotten gains.

Disgorgement payments can be completely or partially waived when a defendant demonstrates that he or she has run out of money and available assets.

Stachnik said the SEC may be giving up too soon.

“We found that improvements could be made to the waiver process to achieve greater assurance that waivers were justified,” Stachnik said in a semiannual report to Congress released this week. His audit covered SEC activities from Oct. 1, 2000, to March 31.

SEC management said it agreed with Stachnik’s findings and is “taking actions to improve the disgorgement waiver process.” The agency has issued written procedures for granting waivers, hired a firm to improve SEC databases dealing with disgorgements and hired a contractor to recommend new procedures, the SEC staff said in its 14-page response.

One investor group agreed that the disgorgement-waiver problem is a serious one, adding that SEC budget constraints made a solution more difficult.

“The agency has to make judgments about what degree of staff, resources and time it should be devoting to recovering these funds as opposed to bringing new enforcement action,” said Barbara Roper of the Consumer Federation of America.

“Were the agency more adequately funded, they might not have to make those trade-offs,” she said.

Roper added: “It’s important that we not reward persistent wrongdoers by walking away. It sends a bad message--as long as you are clever and persistent in hiding funds, you are going to be able to walk away without having to pay.”

The legal effort can take many years and be very costly, prosecutors have found. For instance, since the 1970s, former penny-stock financier Robert Brennan fended off government efforts to recover money lost by investors.

While filing for bankruptcy protection, Brennan retained a taste for yachts and private jets. In April, he was convicted of bankruptcy fraud and money laundering.