SEC Enforcement Cases Decline 9%
Friday, November 3, 2006
The number of new enforcement cases brought by the Securities and Exchange Commission fell by 9 percent last year as the agency grappled with staffing cuts brought on by a recent budget crunch, according to figures released yesterday.
SEC Chairman Christopher Cox said in a statement that the agency's work in the fiscal year ended Sept. 30 had produced "solid results for investors," including settlements of $800 million with insurance firm American International Group Inc. and $400 million with District mortgage giant Fannie Mae.
The agency's reduced tally of 574 enforcement actions included 91 cases against shell companies that failed to file regular financial reports. That issue has become an SEC priority of late, but pursuing those cases takes less time and fewer resources than most other actions. Former agency lawyers said such cases amount to going after low-hanging fruit.
Cox attributed the decline to temporarily reduced staff levels. The SEC as a whole lost 155 employees last year -- including 43 in the enforcement unit -- compared with fiscal 2005. A total of 3,696 people worked at the agency in 2006, with 1,189 in the enforcement division. The agency is reviewing its staffing levels and plans to restore some of the unfilled positions, officials said.
In recent years, the SEC has faced criticism for failing to uncover widespread accounting fraud at such companies as Enron Corp. and WorldCom Inc. as well as trading abuses at mutual funds. Those scandals prompted Congress to pour hundreds of millions of dollars into the agency's coffers.
But more recent financial difficulties, including construction overruns on its new headquarters near Union Station, led to a budget shortfall last year and a hiring freeze that only recently has been lifted, officials said.
Law professors and former agency officials who follow the SEC's work said they are closely watching the agency's budget, which held relatively steady at $888 million last year. They said they are hoping it does not suffer further cuts and would prefer to see it grow modestly to accommodate merit raises for current staff members.
Cox told the Senate Banking Committee last summer that the agency did not need more resources to handle the 130 stock option backdating cases it is investigating, a stance that some analysts have questioned.
"Given the budget cutbacks in the number of people in the SEC's enforcement arm, and the ongoing corporate scandals, all investors should be worried," said Lynn E. Turner, a former chief accountant at the agency who is now director of research at the proxy advisory firm Glass, Lewis & Co. "It will put much of the enforcement burden on the shoulders of investors, just as existed before Enron was exposed, contributing to investors losing tens of billions of dollars."
Duke University law professor James D. Cox, who is no relation to the SEC leader, said: "You get what you pay for. It's been clear in the history of the SEC that as the budget goes, so goes enforcement."
Starving the agency throughout the 1990s meant that SEC officials did not have enough people to review the financial reports of the nation's largest companies every three years, an issue that came to light only after Enron collapsed into bankruptcy in December 2001 and investors learned that its books had not been examined by regulators.
Joel Seligman, author of a history of the SEC and the president of the University of Rochester, said he is not surprised that the enforcement figures have leveled off given the burst of activity following accounting frauds and mutual fund trading scandals in the past few years.
"I do not have the sense that the SEC is pulling its punches," Seligman said.