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Bill Offers Little to Defrauded Investors

Outlook: Lawmakers' proposal to repay shareholders with fines collected from executives is filled with problems, many experts say.


NEW YORK — Congress' plan to reimburse defrauded shareholders with penalties paid by corporate wrongdoers sounds good in theory but probably would do little to help most investors, experts said Thursday.

The proposal is part of the massive accounting and financial reform bill passed by the House and Senate on Thursday and sent to President Bush. It calls for all fines assessed against executives and corporations by the Securities and Exchange Commission to go to a victim restitution fund. That money now is sent to the Treasury Department.

Lawmakers touted the plan as a way to compensate shareholders who have lost huge sums in the flood of accounting scandals.

But the relatively small amounts typically collected in such cases, coupled with the logistical difficulty of disbursing funds to potentially millions of people, means victims would receive little money, many experts said.

"It's going to be very hard for investors to prove they're entitled to get some of this money," said Stephen Bainbridge, a UCLA corporate and securities law professor. "It's going to be costly to administer this program, and you're going to get pennies on the dollar."

Lawmakers are anxious to show they are responding to the corporate scandals and are helping victims, experts said. But it would be better to earmark the money for the SEC to hire additional lawyers and accountants to prevent future frauds, Bainbridge said.

The SEC collected $23.9 million in penalties last year, and has taken in $44.9 million so far this year. But that is a fraction of the billions of dollars in stock value lost by shareholders of WorldCom Inc., Enron Corp. and others.

The SEC already compensates some victims out of a separate program requiring executives to disgorge ill-gotten gains. Such gains include salary, bonuses and stock option proceeds that managers received during the period their fraud occurred.

But the disgorgement program illustrates the difficulty the SEC faces in collecting money and dispensing it to victims.

The SEC won court orders last year requiring executives and companies to disgorge $530 million, but the agency collected just $27.5 million, or 5% of the total ordered.

Of the $632 million in court-ordered disgorgements this year, the SEC so far has taken in $73 million, or 12% of the total.

Investors have received even less than the amounts recovered because the SEC, working with the courts, reimburses investors only in cases in which it is financially feasible to do so, said Brian Gross, an SEC spokesman in Washington.

The relatively small amounts recovered reflect that some executives go broke because of their free-spending ways and because of attorney costs and have no money left to disgorge. "A lot of funds are simply gone by the time you get to them," Gross said.

When the SEC determines it is uneconomical to pay victims, any disgorgement money is funneled to the Treasury, Gross said. The agency has no figures on how much disgorgement money has found its way into investors' hands over the years, he said.

Still, defrauded investors probably would welcome any dollars they could get through the SEC. Their alternative--private shareholder lawsuits--typically provide low recovery rates as well.

Indeed, class-action lawsuits that shareholders bring against companies often generate big headlines, but investors usually receive only a fraction of what they lost, data show.

Since 1990, the average securities class-action lawsuit has been settled for 12 cents of every dollar in claimed losses, according to National Economic Research Associates Inc., a White Plains, N.Y., consulting firm. And that excludes attorneys' fees, which can lop 30% or more off a settlement.

Investors who are eligible for restitution from the SEC usually are notified by the agency. They also can fill out claims forms placed in ads in financial newspapers and other publications, Gross said.

But figuring out who is owed money, and getting it to them, is a time-consuming and expensive process for the SEC, and would only get worse under the corporate reform bill, experts said.

"The administrative mess in trying to figure out who is a deserving shareholder in a single securities suit is typically a monumental headache," said Michael Young, a civil defense attorney at Willkie Farr & Gallagher in New York. "How are they possibly going to calculate deserving shareholders in all the securities fraud actions over the course of the year?"

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