The SEC and the Justice Department have all but given up on billions of dollars' worth of penalties because defendants had proved their inability to pay. SEC officials have "waived" about $800 million in penalties, while the Justice Department has labeled $5 billion of its delinquent debts as uncollectable. No one pursues those debts unless new evidence surfaces about a defendant's financial status.
When the FTC or the SEC comes up short, uncollected debts are shuffled from one federal bureaucracy to another until they reach the Internal Revenue Service, which has an even lower collection rate.
Under a 1996 law, the Treasury Department was named the government's primary collector of delinquent debts, but its effort sputtered at the start. Treasury officials spent $7 million on a debt-tracking computer system they later abandoned, according to the Treasury inspector general's office.
Since then, the SEC has referred about $237 million of its old debts to the Treasury Department, while the FTC has referred about $220 million, officials said.
So far, Treasury officials say, they have collected $19.5 million--less than 1% of the $2.2 billion in debts referred to them under the new initiative. Officials say they also have compelled debtors to enter agreements to repay an additional $64.8 million.
If the Treasury Department is unable to collect the judgments, it will recommend that regulators write them off. Then the IRS can tally the forgiven judgments as income to the accused con artists and tax them accordingly. Still, the IRS itself can expect to collect only 13% of the revenue due from people who haven't paid voluntarily, the General Accounting Office, an arm of Congress, estimated last year. Most of the $214-billion balance due is from people and corporations that are in bankruptcy protection or evading payment.
But before cases end up in the Treasury program, they may bounce around the federal court system for years.
"There's a real tension in the law," said Eileen Harrington, director of marketing practices for the FTC. "The laws of collection and judgment were written basically for legitimate interests. When you add . . . a criminal mind, it gets tougher."
Last month, for example, the SEC went to court in Washington to press its 10-year-old case against corporate raider Bilzerian, who owes $62 million on his civil judgment. Bilzerian had also been convicted of securities fraud in 1989.
After regulators accused him of securities law violations, he filed for Chapter 7 bankruptcy protection. Bankruptcy law requires courts to throw out all civil debts, so the SEC, in effect, had to file its case again--and it lost, twice.
An appellate court finally upheld the judgment. And last month, a federal judge warned Bilzerian that he could soon be found in contempt and face prison if he doesn't pay. In the meantime, the SEC said, Bilzerian has been living at a Tampa, Fla., estate worth $3.5 million.
SEC officials claim he protected it and two other homes he owned by transferring them first to his wife's name and then to a Nevada limited partnership controlled by a Cayman Islands corporation--which in turn is owned by a Bilzerian family trust.
Bilzerian also sought shelter in a state law often used by lawbreakers in Florida and Texas--and to a lesser extent in California and elsewhere: the homestead exemption, which can make even lavish homes off-limits to the regulators or other creditors.
Even if a government agency gets its civil claim recognized in Bankruptcy Court, it must stand in line with other creditors. And in criminal cases, in which bankruptcy laws do not protect debtors, collections sometimes suffer because of lax enforcement, according to a GAO study of Los Angeles and Dallas cases.
In one case, a probation officer let a Beverly Hills doctor convicted in an insurance scam pay just $200 a month toward her $10,000 fine. The doctor had reported that her pool cleaner and her gardener were "necessary expenses," according to the GAO.
Another offender, owing $168,000 in penalties for his role in a fraud scheme, was allowed to sell his second home for $680,000 without applying the proceeds to his sentence. Another offender took a $6,000 European cruise after his sentencing despite owing a $50,000 fine, the GAO report said.
And those were cases in which the offenders disclosed their household finances and the location of their assets. Lawbreakers can conceal their holdings in any one of dozens of countries with strict bank secrecy laws and a lax attitude toward U.S. fraud regulations.
Only the more savvy criminals insulate themselves from court judgments by using offshore accounts. More typical is the example of Rory Cypers, who lived comfortably even while a court-appointed receiver was trying to collect from him.
When Cypers settled the FTC's allegations against him, he pleaded poverty and said he would empty the last $10,000 from his bank account to help defray the judgment.
