There were two interesting news items this week regarding what the nation’s regulators are doing to protect investors – one from the SEC and the other from the Department of Justice. The SEC announced that it "is in the process of re-establishing an Investor Advisory Committee," while Commissioner Luis A. Aguilar expressed disappointment that the Committee was not being re-established sooner. Meanwhile, the U.S. Department of Justice Office of the Inspector General issued an Audit Report criticizing the Complex Asset Team of the U.S. Marshals Service for its management of complex assets, including its handling of certain assets seized from Bernard Madoff.

The SEC Investment Advisory Committee.

The SEC had previously established an Investment Advisory Committee in June 2009 under the Federal Advisory Committee Act. However, that committee was terminated in November 2010, with the intention that it would be quickly re-constituted to meet the Commission’s statutory obligation under the Dodd-Frank Act. 

Tuesday’s announcement by the SEC was made in connection with its announcement regarding the formation of another committee, the Advisory Committee on Small and Emerging Companies ("ACSEC"), which will focus on interests and priorities of small businesses and smaller public companies. The SEC went as far as to announce 19 members and two overseers for the ACSEC. At the end of its announcement, the SEC added a brief statement about the Investment Advisory Committee, merely noting that it was mandated by the Dodd-Frank Act and would replace the June 2009 Committee.

In a speech yesterday, Commissioner Luis Aguilar called the Investment Advisory Committee "essential" and stated:

In the current environment, revelations of egregious fraudulent conduct and recent market conditions continue to demonstrate the vulnerability of investors. Furthermore, the millions of American families trying to save for retirement, education and a better life are the same investors most impacted by the wild stock market swings we have witnessed, as the stock market has lost over a trillion dollars in value in the past two months.

Commissioner Aguilar stated that he was "disappointed that the Investor Advisory Committee has not been re-established," and urged that it be done "immediately." Commissioner Aguilar also said that his vote regarding the establishment of the ACSEC "was conditioned on the Investor Advisory Committee being formed and operating prior to, or at the same time as, the formation of the ACSEC." He expressed displeasure that the press release regarding the ACSEC "did not state a date or deadline by which" the Investment Advisory Committee would be formed. 

DOJ’s Criticism of the Handling of the Madoff Assets.

The Asset Forfeiture Division of the United States Marshals Service ("USMS") manages and disposes of properties seized and forfeited by federal investigative agencies and U.S. Attorneys nationwide (and by March 2011 held seized assets estimated to be worth over $3.8 billion). The Complex Asset Team within the Asset Forfeiture Division works with USMS district personnel to help secure, appraise, and dispose of assets requiring specialized commercial expertise. During an investigation into allegations (which were not substantiated) that an official with the Complex Asset Team, owned a private appraisal business that presented a conflict of interest with his official duties, concerns arose regarding "potential irregularities in the USMS’s management of complex assets." As a result, The Department of Justice’s Office of the Inspector General ("OIG") conducted an audit "to assess how the USMS managed and oversaw seized and forfeited assets that USMS district offices referred to the Complex Asset Team between 2005 and 2010.

The 98-page report, entitled "Audit Of The United States Marshals Service Complex Asset Team Management And Oversight," addressed a number of issues concerning the handling of assets seized from Bernard Madoff.

OIG concluded that the Complex Asset Team was using "informal valuation and disposal procedures." With respect to Mr. Madoff, two assets garnered particular attention: over 1,000,000 million shares in PetCare Rx (an online pet prescription firm); and a 5 % share of the Delta Fund (an investment portfolio of foreign technology companies). In preparing to sell these assets, the Complex Asset Team did not publicly announce the sales of these assets because, according to the Report, "he believed the potential market of buyers was restricted by the nature of existing partnerships tied to the assets," and as a result he sought to sell them to existing partners.

The Assistant United States Attorney handling the Madoff matter objected to the proposed methodology because "the methods for valuing the assets, locating buyers, and negotiating sales were not transparent." The AUSA requested and received approval to hire an external contractor to restart the disposition process for these assets instead of working with the Complex Asset Team.

The OIG agreed, pointing out that "the Complex Asset Team’s informal approach to the valuation and disposal of assets undermined its perceived competency among DOJ Asset Forfeiture Program partners." OIG recommended that "the USMS implement detailed policies outlining the circumstances in which the Complex Asset Team should employ a public process to dispose or sell assets."