Memo to federal regulators: it’s not enough to impose fines; you have to make sure you collect them if you want people to be afraid of you. The same goes for private litigants thinking of suing to collect money they’re owed. Without chance of collection, what’s the point?

The Wall Street Journal reported on Friday that the Securities and Exchange Commission and the Commodity Futures Trading Commission have failed to collect more than one-third of the $12 billion in penalties handed out since 2005. Looking at the CFTC alone, a staggering 75% of fines imposed are not being paid.

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This story reminded me of my debtor-creditor professor in law school who opened his second-year course with a speech that said something like:

“In first year, you do the baby courses – torts and contracts – where A sues B and A wins. Now in second year, we find out that B often doesn’t have to pay. In the real grown-up world, B wins.”

In the real world, B may have well-protected assets in a series of limited liability companies or limited partnerships, and can afford a little more risk than a person with 100% equity in a house held in his own name. B may also have real estate you don’t know about because it’s in a different state or offshore. B may also own shares in companies with good liquid assets, but first you have to identify those companies.

While the government imposes fines first and then figures out how to collect, private litigants get to decide ahead of time whether suing someone is worth the effort. Later on, the decision may come once they have a default judgment in hand, but no hint of easily-seized assets.

Here is a brief checklist of some of the things our clients like us to look for when doing asset searches:

  • Where does the subject live? Who owns the house? If it’s a company, that could be his.
  • Who owns his place of work? Some people like to have the shareholders pay rent to the landlord, who turns out to be the company president collecting rent for himself.
  • Are any companies you don’t already know about run out of either home or office?
  • Has anyone ever sued or been sued by any of the companies we may now be discovering? Litigation opponents who got discovery against our subject may know lots more about him than we do.
  • Interviewing people with knowledge of the subject can yield tremendous results in a highly-cost effective way. The public-record steps taken above can spit out the names of a dozen people easily located and contacted in a matter of hours.

The cost of such an investigation done right is often a tiny fraction of the money at stake or the fees involved in complex litigation.