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GAO Rules SEC May Not Add Post-Judgment Interest to Distribution Funds for Investors

Bruce Carton | April 4, 2012

On March 30, 2012, the U.S. Government Accountability Office released a decision finding that post-judgment interest recovered by the SEC in its enforcement actions may not be distributed to injured investors, as the SEC has done in the past. The GAO found that under the "miscellaneous receipts statute," 31 U.S.C. § 3302(b), such money must be deposited into the general fund of the Treasury.

Under Sarbanes-Oxley Section Section 308 ("Fair Funds for Investors"), the SEC is authorized SEC to create special distribution funds to hold disgorgement and civil money penalties it recovers for investors. The SEC is also entitled under 28 U.S.C. § 1961 to charge and recover for post-judgment interest that accrues on any unpaid portion of such money judgment from the date of entry of the money judgment until the judgment is paid in full to SEC. Neither Section 308 nor other statutes such as  the Remedies Act, however, specify whether post-judgment interest may be added to a distribution fund (although the SEC has added post-judgment interest to distribution funds in the past, such as the $9.5 million it added to the Invesco Fair Fund).

The miscellaneous receipts statute requires that “an official or agent of the Government receiving money for the Government from any source shall deposit the money in the Treasury as soon as practicable without deduction for any charge or claim.” Although the SEC argued that post-judgment interest does not constitute “money for the Government” under the statute, the GAO disagreed.

The GAO found that SEC's authority to divert any money away from the Treasury and into distribution funds is constrained by the plain language of the Remedies Act and the Sarbanes-Oxley Act, which do not address post-judgment interest. The SEC asked the GAO to infer such authority under the provisions of the Remedies Act and the Sarbanes-Oxley Act, but the GAO was unwilling to do so, stating that "[w]e cannot presume that Congress intended an exception for postjudgment interest that accrues to the government, particularly where Congress has been specific otherwise as to the nature of the receipts that SEC can credit to distribution funds."

Bottom line: Less money will go to injured investors and more money will go to the Treasury under this decision. A spokeswoman for the SEC said this week that the agency is "carefully studying the decision."