Aging Analysis of Redress Funds Held on Account: Memorandum to Jodie Bernstein, Director, Bureau of Consumer Protection

Audit Report Number:
00-047

MEMORANDUM

TO: Jodie Bernstein
Director, Bureau of Consumer Protection
FROM: Frederick J. Zirkel
Inspector General
SUBJECT: Aging Analysis of Redress Funds Held on Account

The Office of Inspector General has completed its audit of the FTC's FY 1999 financial statements. As part of this audit, the audit team reviewed cash balances held by the agency's three redress contractors and by the FTC in a U. S. Treasury suspense account. Funds with contractors represent, for the most part, amounts to be distributed to consumers, while funds in the U.S. Treasury suspense account are usually (i) provided to contractors for eventual distribution to consumers, or (ii) disgorged to the Treasury. On only rare occasions will the FTC make distributions directly to consumers from its suspense account.

As of September 30, 1999, the agency's three redress contractors were holding $29.9 million in funds on FTC cases. This represents a 63 percent increase in funds held by contractors on September 30, 1998 ($18.3 million). Similarly, there was a 23 percent increase in funds held in the Treasury's suspense account, from $4.3 million on September 30, 1998 to $5.3 million on September 30, 1999.

Based on our aging analysis of these cash accounts and discussions with case managers, it appears that funds are unnecessarily sitting in accounts instead of flowing through to either consumers or the U.S. Treasury. Of course, the longer the delay in providing redress (whether for justifiable reasons or not), the fewer the number of consumers who will ultimately receive any redress. This is the result of predictable consumer mobility. While we recognize that redress may be delayed pending the completion of collection efforts, we believe that it is not in the best interest of consumers for the agency to hold funds for extraordinary lengths of time and still perform a credible redress distribution.

Aging Analysis of Redress Funds Held on Account

TABLE OF CONTENTS

Results of Analysis
Old Funds on Deposit with FTC Redress Contractors
Old Funds on Deposit in the FTC Suspense Account
Conclusion
OIG Analysis and Recommendations

Results of Analysis

To determine how long cash remains in an account along with the reasons why aged funds are held pending redress or disgorgement, an aging analysis was prepared (See Attachment). Using this analysis. the OIG identified 30 cases with funds on deposit with redress contractors totaling $10 million that were two years old or older on September 30, 1999. This amount comprised one-third of the $29.9 million in the redress contractors' accounts on this date.(1) Discussions with case managers on six (6) of the largest cases totaling $7.5 million of the $10 million revealed that funds have been on deposit awaiting final disposition for between 24 and 106 months, with a median of 43 months.

The OIG's reconciliation and aging analysis of the FTC Suspense Account at Treasury (Account No. 6875) found that of the $5.3 million in this account on September 30, 1999, $2 million from 33 cases was between 24 and 127 months old and awaiting final disposition. The OIG selected five (5) of these largest cases with a median age of 55 months, totaling $1.1 million, for detailed review.

The OIG interviewed staff attorneys, RAO personnel and FTC redress contractor staff to identify the reasons for maintaining funds on account for such long periods of time. We also reviewed account activity statements for the suspense account, monthly contractor redress reports, and case judgments. Below is a synopsis of the case information we collected.

Old Funds on Deposit with FTC Redress Contractors

With few exceptions, all funds on account with the redress contractors were deposited with the expectation of providing redress. The six cases we reviewed with $7.5 million on deposit were opened between 1987 and 1996.

1. Career Information Services (X960058). The stipulated final judgment was issued March 17, 1997. Funds have been on deposit since April 1997 ($350,000) with additional deposits and interest earnings through 09/30/98 of $1.2 million. As of 09/30/99, there was $1,642,000 on deposit with the contractor. There has been no redress activity on the case. The FTC and the contractor have been unable to locate consumers. FTC staff told the OIG that disgorgement will be made only after other alternatives, including consumer education, are considered.

2. American Computer Industries (X950055). A stipulated final judgment was issued November 22, 1995. An initial deposit of $677,300 was made to the contractor's bank account in February 1996. Since then, there has been sporadic deposits and interest earnings bringing the balance on account as of 09/30/99 to $820,000. The attorney in charge of the case left the FTC for 18 months and told the OIG that he was surprised to learn that the funds were still on account with no distribution having occurred. He is currently working with the FTC redress contractor to identify claimants for a possible distribution.

3. South West Sunsites (X870011). A consent judgment was entered by the court on May 2, 1990. The defendants in this case paid just over $1 million up front against a $2.5 million judgment in late 1990 / early 1991. The contractor made an initial distribution on or about May 1991, and had planned a second distribution for June 1992 pending the receipt of more funds. Although the FTC attorney was able to collect an additional $500,000 from the defendants in 1991 (shortly after the first distribution), this was far less than expected and no additional funds were collected. In 1992, the case was referred to DOJ for collection. At the time, the FTC thought money would be collected by DOJ as the guarantors had money. DOJ sued the guarantors of the judgment, but collected nothing.

As of 09/30/99, there was $710,000 on deposit with the contractor. The FTC attorney told the OIG that she believes that no more money will be collected and would like to make a second distribution with the $710,000. She has stayed in contact with some consumers, although locating the whereabouts of the 1,500 consumers originally scammed will be difficult after nearly eight years. The attorney told the OIG that she has spent no time on this case for years, and will need some additional time to close out the case, e.g., get consumers their money.

4. Metropolitan Communication (X940024). A final judgment against select defendants was handed down by the court on or about July 1994, resulting in an initial deposit of $220,000 into the contractor's account. Additional judgments against remaining defendants were handed down by the court in September, 1997, resulting in another deposit of $1.6 million to the contractor. $1,925,800 was on deposit with the contractor as of 09/30/99. There has been no distributions made on this case. The case is in receivership. A distribution plan was submitted to the court in the fall of 1999. The receiver is awaiting the court's approval of that plan.

5. United Wholesalers (X950004). Final judgment was handed down by the court on January 5, 1996. The FTC attorney told the OIG that the contractor has been holding $1.2 million since early 1996. As of 09/30/99, there was $1,459,000 in the account. The FTC provided the contractor with "tap cards" seized from the defendant which the contractor used to perform a postal check for valid addresses. However, according to the FTC attorney, the contractor cannot do the distribution because the receiver has not filed a final report with the court pending income tax and asset-ownership issues. According to FTC staff, these tax/asset ownership issues have been on the table since the signing of the consent order in early 1996.

Recently, FTC staff have considered preparing a motion to the court for permission to distribute the funds held in the account to consumers. According to staff, the customer list will need to be updated due to the delays in distributing funds, which will be paid for with funds on account with the contractor, resulting in less funds for consumers.

6. Twinstar (C3307). The court order became final October 2, 1990. According to contractor staff, the first deposit was made on 11/6/90 for $500,000. Another deposit was received in May 1995 for $275,000. There was $940,000 on account at the contractor as of 09/30/99. Growth in the account is attributed to interest earnings as there has been no other deposits and no redress made from this account. Contractor staff did not know what the attorney planned to do with the money - redress or disgorgement. Contractor staff told the OIG that it will hold the money and keep the account open until told otherwise by the FTC attorney. The FTC regional office case manager was on a leave of absence during the audit and thus was not available to discuss the case. The RAO could not provide any additional information on the status of the distribution for the case.

Old Funds on Deposit in the FTC Suspense Account

Funds maintained in the FTC suspense account ( Account No. 6875) generally represent funds awaiting disposition (i) to the contractor for redress, or (ii) to the general fund of the Treasury (disgorgement).(2) No interest is paid on funds held in the suspense account. In the five largest dollar cases reviewed by the OIG, funds have been on deposit for between 51 months and 127 months. In the one case with funds 127 months old, regular deposits were received for 10 years beginning in 1989. The five cases we reviewed were opened between 1988 and 1995.

1. Robbins Research (X950044). A consent decree was entered on June 14, 1995. There has been $221,300 sitting in the FTC redress suspense account since then with no activity. An attorney told the OIG that he was surprised that no action has been taken on the case, and incorrectly speculated that the funds were possibly a civil penalty payment.(3) He said that the attorney most familiar with the case, and who worked on this aspect of it, has since left the Commission.

2. Pase Corporation (X940059). An order for final judgment was entered February 6, 1997. (A summary judgment was presented to the judge in 1995, but the judge did not issue her ruling until February 1997.) As of 09/30/99, there was $293,000 in the suspense account. According to the FTC attorney, the case involved a $16 million judgment. She identified $2.7 million in liquid assets and automobiles that could be liquidated. The FTC collected $16,400 in March 1995 and $10,000 in April 1998 from the defendants. The case was referred to Treasury, which has collected an additional $267,000.

Many consumers lost upwards of $20,000 in the scam, with the bulk of the scam occurring in 1994. There are 100,000 consumers eligible for redress, although the FTC attorney admits that the chances of locating many of them now is not good. She feels that $293,000 is not enough to do a credible redress distribution when the total loss was upwards of $16 million.(4)

3. Academic Guidance Services (X920073) A consent order was signed July 16, 1993. As of 09/30/99, there was $187,000 in the FTC's suspense account at Treasury. There were two deposits - both wired from the contractor: $180,000 was wired in April 1995, and another $7,300 was wired in December 1995. The case manager left the FTC and the OIG was unable to identify another current FTC attorney who could respond to our questions about the case.

4. Atlantex/Petro Fund (X880045) The final judgment was issued November 25, 1987. The first deposit was received in the FTC suspense account in February 1989 for $6,500. Miscellaneous collections have been deposited in the account for approximately 10 years for amounts between $9.16 and $21,000. The case was also with Treasury for collection, with its last collection on September 18, 1998, for $22,500. As of 09/30/99, there was $197,200 in the suspense account. The FTC attorney told the OIG that she instructed the RAO months ago to have the money in the account disgorged as no additional funds are anticipated. According to RAO staff, RAO policy is to disgorge funds only upon written notification from the attorney. RAO staff told the OIG that it received no written instructions to disgorge funds on this case.

5. Hannes Tulving Rare Coin (X900050) A consent order was signed by the court on June 22, 1992. The financial records for this case show that the defendant complied with the order and made all payments between 1992 and 1997. There has been no payment activity since December 1997. As of 09/30/99, there was $245,309 in the account. According to the FTC attorney, because so little was collected relative to the value of the scam (estimated at $10 million or more), redress was never considered.

The FTC attorney told the OIG that he asked the RAO to disgorge this money on or about June 1997 when the last payment was made. He told the OIG that he never followed up with the RAO to determine whether funds were disgorged. The OIG did not locate a memorandum to disgorge funds in RAO's case file.

Conclusion

The OIG met with RAO staff to determine what procedures it follows to monitor the aging of account balances and to evaluate the reasons for such long periods of inaction. RAO staff told the OIG that they do monitor cases including the flow through of funds in the contractor and suspense accounts. But staff admitted that it is the case manager, not the RAO, that makes the final decision on whether to close an account and/or disgorge the funds. RAO staff and some attorneys we spoke with told the OIG that if redress is not possible, other consumer-related uses for the funds are considered before funds are disgorged to the general fund of the Treasury. Exploring these alternatives is often a low priority when other pressing job demands are juxtaposed against it. Consequently, while these alternatives are being explored, funds often sit in accounts for many years.

The OIG believes that in at least eight of the 11 cases we reviewed, funds were deposited with the intention of providing redress to consumers.(5) But because of staff attrition, new case demands, receiver control of assets, and the endless wait for defendants to make most if not all payments due from them without any management deadlines established, funds often remain in these (contractor and suspense) accounts for extensive periods of time. Although redress may still occur on some of these cases, most likely funds will be disgorged on most of them. The risk of delay in making a belated distribution is to lose contact with defrauded consumers. Consumers fortunate enough to have stayed in touch with the FTC and/or did not relocate, will get a larger share of the redress because, in addition to their share, they will also receive that portion belonging to those consumers the agency can no longer locate.

The OIG questions the utility of allowing funds to remain in contractor bank accounts or the Treasury suspense accounts for long periods. Based on our analysis of the 11 cases presented above, the OIG has identified nine (9) cases totaling $6.5 million with funds that could have been turned over to consumers, or in some cases deposited in the Treasury General Fund more quickly if management oversight of these cases was in place. Consequently, the OIG estimate of funds put to better use is $6.5 million.

The OIG met with RAO staff to discuss the findings and recommendations contained in the report. RAO agrees with the recommendations and is developing a strategy to best implement them. BCP and regional office staff greatly assisted our review.

OIG Analysis and Recommendations

To address the issues raised in this report, the OIG recommends that BCP management take the following steps:

Recommendation 1a. RAO review all cases that have funds in the FTC suspense account to determine if a redress distribution is appropriate. In those cases where redress is considered appropriate, the funds for these cases should be immediately transferred to contractor accounts so interest can be earned on the balances pending the distribution. If a distribution is not deemed practical, the funds should be disgorged to the U.S. Treasury.

Recommendation 1b. When an alternative to disgorgement is to be investigated by staff, management agree to this approach and establish a firm due date for when the review and/or action is to be completed.

Recommendation 1c. To facilitate the fiscal year 2000 financial statement audit, RAO provide the OIG on or before 10/31/00 with a summary detailing management's decision on each suspense account case.

Discussion: With Department of Treasury regulations regarding funds held in suspense account #6875 set to become effective June 30, 2000, the FTC (and other Federal agencies) will no longer have a suspense account option to deposit funds for extended periods. Rather, a temporary fund will be established for flow-through purposes. That is, funds can be deposited in the Treasury by defendants in FTC cases for transfer to an FTC contractor. However, funds will not be permitted to reside in this account for extended periods as they have in the past.

Recommendation 2. BCP centralize in the RAO the authority to monitor and set deadlines for staff to dispose of redress funds. Reasons given for redress distribution delay, whether by staff, contractors or receivers, need to be documented and routinely reported to senior management.

Discussion: Based on our discussions with agency staff regarding the disposition of funds held in contractor and FTC suspense accounts, the OIG believes that most explanations for maintaining funds in these accounts for two years or longer simply do not justify this outcome. The press of other cases and responsibilities faced by staff preclude their full attention to distribution-related issues, often resulting in funds maintaining their suspense status for longer than optimal time periods. Further, even when staff attention is directed at collecting all or most funds owed consumers, this effort itself has been shown to delay the actual distribution of funds to consumers, resulting in less consumers receiving more money (as opposed to more consumers receiving somewhat less). In addition, FTC staff occasionally leave the agency, resulting in further delays in addressing these issues.  

Decisions regarding when to make distributions, and whether to make multiple distributions, must be made with management input. The OIG believes that these decisions should be made within certain time frames to ensure that the maximum number of consumers will benefit from FTC efforts to redress their injury, or conversely, provide the funds to the U.S. Treasury when redress is unlikely.

Recommendation 3. The OIG recommends that RAO investigate whether $58,000 in payments made to the Treasury's Debt Management Service and the Department of Justice for FTC v. Pase Corporation (x-940059) are valid payments in keeping with existing interagency agreements with the two agencies.

Discussion: While the OIG has observed several instances of successful collection of past due judgments by the Department of Treasury or the Department of Justice, we have not observed an outcome where the Department of Treasury and the Department of Justice have together played a role in such outcomes. The concern for the OIG is twofold: (i) that over $58,000 has been paid out, and was still being paid out as of 09/30/99, to both agencies; and (ii) that the case manager, RAO staff and/or the Assistant CFO for Finance could not explain why this fee was being collected.

Endnotes:

1. The OIG initially went back only two years (09/30/97) to identify our sample of cases because records were readily available within the agency for this period. For the six cases selected for detailed review, we held discussions with FTC and contractor staff to identify relevant events preceding this date.

2. New regulations from the Department of Treasury regarding funds held in the U.S. Treasury suspense account, effective June 30, 2000, require agencies to review all funds in this account to either (i) transfer to other deposit accounts, or (ii) close the account. Funds will no longer be permitted to remain on deposit for months or years pending a decision on their disposition.

3. The consent decree states that funds paid by the defendant are to be used to provide consumer redress.

4. On this particular case, the OIG also noted that both the U.S. Treasury collection service and the Department of Justice have assessed collection fees of approximately $58,000 during August - September, 1999. Based on our review of cases, this dual assessment of fees is unusual. Neither the case manager nor the Assistant CFO for Finance knew of or could explain this deduction.

5. Robbins Research, Pase Corporation, Academic Guidance Services, American Computer Industries, South West Sunsites, Metropolitan Communications, United Wholesalers, and Twinstar.