* Judge faults SEC "indifference," demands improvement
* $1.5 billion accord addressed biased stock research
* $55 million earmarked for investor education
* SEC, FINRA foundation to address court's statements
(Updates with comments of FINRA foundation, SEC, paragraphs 8-10)
By Jonathan Stempel
NEW YORK, July 25 (Reuters) - U.S. securities regulators drew sharp criticism from a federal judge who said they have failed to properly oversee a $55 million investor education fund created by a nearly decade-old settlement with Wall Street banks.
The fund had been created as part of a roughly $1.5 billion regulatory accord in 2003 with Citigroup Inc (C.N), Goldman Sachs Group Inc (GS.N), JPMorgan Chase & Co (JPM.N) and other banks accused of publishing biased analyst research.
U.S. District Judge William Pauley in Manhattan said the U.S. Securities and Exchange Commission has shown a "lack of oversight" and "indifference" toward how a nonprofit foundation charged with distributing the money has been managed.
While noting that some of the funds are being used, he faulted the regulator for tolerating "opaque" and seemingly wasteful spending by the nonprofit, the FINRA Investor Education Foundation, as well as "inadequacies" in its auditing.
Pauley pointed as an example to a two-year, $91,500 grant to the Genesee District Library in Flint, Michigan, that appeared to have resulted in just two events, one of which concerned "spending, sharing, and saving" for children ages two to five.
"While there may be benefits to starting investor education early, toddlers seem beyond the pale," the judge wrote in an order issued Wednesday.
In the order, Pauley demanded that the SEC and the foundation end seven years of noncompliance with his 2005 directive that annual audits be filed, and that an accounting of receipts and expenses in "reasonable detail" be provided.
George Smaragdis, a spokesman for the FINRA foundation, said: "We strongly disagree with many of the court’s statements and will provide the court with the additional detailed information it requests. We are confident that the investor education funds from the global research analyst settlement are being used for maximum public good."
SEC spokesman John Nester said: "We appreciate that the court has recognized the progress that has been made in distributing the investor education funds and look forward to responding to the court."
The Genesee library system had no immediate comment, saying the person in charge of the $91,000 grant was out of the office.
The 2003 settlement had been engineered mainly by Eliot Spitzer, New York's attorney general at the time.
It was intended to end a scandal over the issuance of positive research by analysts, including one-time stars like Citigroup's Jack Grubman and Merrill Lynch's Henry Blodget, to help their employers win investment banking business.
Pauley, who oversees implementation of the settlement, has periodically criticized whether its ends were being met.
Three years ago, he directed that $79.3 million meant for investors instead go the U.S. Treasury because regulators and banks could not agree how to distribute it.
In Wednesday's order, Pauley offered several other examples of what he considered questionable spending of the education funds.
The judge said "something arguably is amiss" about what he estimated as the $57,000 cost of a full-day seminar that drew 130 attendees in Wheeling, West Virginia. That price tag was "more than twice the price of an average wedding," he wrote.
Something also seemed amiss to the judge about a November 2011 financial fraud conference where SEC Chairman Mary Schapiro gave an address, and which was co-sponsored by the foundation. It was held at Washington, D.C.'s Sofitel hotel.
"It is concerning that an entity selected to disburse millions of dollars for investor education recovered by an agency of the United States government would choose to hold a conference at a luxury hotel in Washington, D.C., rather than at the SEC's headquarters or FINRA's offices in the same city," he wrote.
Pauley also said that the SEC had originally agreed to maintain "continuing oversight" over the education funds but rather appeared "to place its imprimatur reflexively on each and every quarterly report, no matter the content."
The funds had been moved in 2005 to the FINRA foundation, a nonprofit set up two years earlier by the NASD, a predecessor to the Financial Industry Regulatory Authority brokerage regulator.
Pauley said the foundation had spent or agreed to spend $44.7 million by the end of last year.
Schapiro led the NASD and FINRA from 2006 until she took her current job in 2009.
The case is SEC v. Bear Stearns & Co, U.S. District Court, Southern District of New York, No. 03-02937.
(Reporting By Jonathan Stempel in New York; Editing by Martha Graybow and Steve Orlofsky)
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