Nebraska State Treasurer – Unclaimed Property Division Special Evaluation Summary This document is an official public record of the State of Nebraska, issued by the Auditor of Public Accounts. Modification of this document may change the accuracy of the original document and may be prohibited by law. Issued on December 19, 2007 State Treasurer – Unclaimed Property Division Special Evaluation APA Summary of Evaluation Procedures On July 31, 2007, the Nebraska State Treasurer (State Treasurer) requested the Nebraska Auditor of Public Accounts (APA) evaluate the records of the Unclaimed Property Division to ensure the system contained accurate information. A contract was signed by the State Treasurer on August 29, 2007, in which the APA agreed to provide staff to evaluate unclaimed property held or processed by the Nebraska State Treasurer’s Unclaimed Property Division. The agreement covered the unclaimed property activity during the period July 1, 2001, through the current date for property selected to be evaluated. The evaluation by the APA compared the State Treasurer Unclaimed Property Division’s information to the supporting documentation available and the identification of any discrepancies. The State Treasurer utilizes ACS Wagers Unclaimed Property Management System (Wagers) for its unclaimed property records. Our evaluation included the following procedures and summaries: 1. Examined physical files on hand at the Unclaimed Property Division offices, including mutual fund statements and stocks noted as “worthless” by the Unclaimed Property Division. 2. Evaluated a listing of stock certificates totaling in excess of $3 million that were transferred to UBS Financial Services, Inc. (UBS) around May 2007. 3. Examined property on hand in the Unclaimed Property Division’s vault, which consisted primarily of safe deposit boxes. 4. Evaluated securities listed in the Wagers for comparison to securities maintained by UBS. 5. Evaluated controls over items received by the Unclaimed Property Division and claims paid by the Unclaimed Property Division. 6. Attempted to evaluate the conversion of the Unclaimed Property Division records from the previous computer application to the current Wagers application used for recording unclaimed property. 7. Attempted to evaluate the deletions, or removal, of records from the Wagers application. 8. Evaluated claims processed by one individual or claims processed by certain individuals as identified by the State Treasurer. 9. Performed other procedures as requested by the State Treasurer. 1 of 20 State Treasurer – Unclaimed Property Division Special Evaluation APA Summary of Evaluation Results 1. Evaluation of Physical Files Including Mutual Fund Statements and “Worthless” Stocks Mutual Fund Statements The State Treasurer Unclaimed Property Division maintains mutual fund statements for funds that have been reported as unclaimed property because the owners of the mutual fund shares could not be located. Numerous companies send statements to the Unclaimed Property Division with securities on the statements registered to the State of Nebraska. A few mutual funds have been transferred to UBS Financial Service, Inc., who is the State’s broker for securities that are unclaimed. The shares held by UBS are not included in this section. The dormancy period for unclaimed securities in Nebraska is five years. Mutual fund companies file reports annually, due November 1st, if they have unclaimed property. After the State Treasurer has held the property for three years, the shares can be liquidated per Neb. Rev. Stat. Section 69-1316(d) R.R.S. 2003, and the proceeds can be deposited to the Escheat Property Trust Fund. If shares have been liquidated, an owner may still claim the cash proceeds from the sales; however, the State Treasurer is not liable for any appreciation in the value of the securities after liquidation. We found there were no specific policies or procedures for updating and maintaining mutual fund statement information in Wagers. We observed statements were typically filed in a filing cabinet until December 2006 and the information was not updated in Wagers on a regular basis. At the time of our evaluation the June 30, 2007, statements had been received and were stacked un-filed on top of the filing cabinet, we inquired about the December 2006 and March 2007 quarterly reports; however, the Unclaimed Property Division was unable to locate any of those statements. The Unclaimed Property Division also did not perform a reconciliation between the statements received from the mutual fund companies and Wagers. Therefore, Wagers did not contain accurate information regarding mutual funds. Our evaluation of the statements at the Unclaimed Property Division noted a total of 224 mutual funds with a total value of $1,829,800 at June 30, 2007. There were also 149 securities found on statements dated prior to December 2006, which did not have a June 30, 2007, statement. We did not determine a value of these securities. In total there were 373 securities noted on statements at the Unclaimed Property Division. See Exhibit A. 2 of 20 State Treasurer – Unclaimed Property Division Special Evaluation Following is a summary of our comparison of the shares listed on the statements to the shares listed in Wagers: See Exhibit A. • 148 of 373 securities were not recorded on Wagers, or any alternate listing. • 188 of 373 securities were recorded on Wagers; however, the shares per Wagers did not agree to the shares listed in the statements from the mutual fund companies. • 149 of 373 securities did not have a June 30, 2007, statement. We recommend the State Treasurer Unclaimed Property Division review the mutual fund statements as they are received and ensure all activity is properly recorded in Wagers timely. The Unclaimed Property Division should also perform, document, and reconcile the mutual fund statements and Wagers information to ensure the activity recorded in Wagers is accurate. “Worthless” Stocks The Unclaimed Property Division maintained folders of securities it deemed “worthless”. In some cases the stocks were not registered in the State’s name and came from unclaimed safe deposit boxes. In other cases, the stocks have been remitted to UBS; however, were returned because the securities were no longer traded. Upon our examination of these folders, it appeared some of the securities in the folders may have value. On October 25, 2007, the APA examined and accumulated a listing of 96 securities that were included within these folders. The following was noted: See Exhibit B. • The Unclaimed Property Division did not have a formal documented policy to define when securities are considered “worthless”. • 26 of the 96 securities examined were not recorded in Wagers. • 26 securities were held in the State’s name, assigned to the State, or were unassigned. The remaining 70 securities were in the names of individuals or companies. • The Unclaimed Property Division did not have procedures to ensure all securities determined to be worthless included appropriate documentation or approval to support the determination of the security as “worthless”. • We tested four securities included in the “worthless” stock folders and determined that all of the securities either had a value listed on a stock exchange or the actual certificate had some value. None of the four securities tested were in the State’s name. However, three of the four were trading on national stock exchanges. There was also a value to collectors of stock certificates for three of the four securities. • We also found 29 authorization confirmation statements, from the State Treasurer to sell or confirm that securities had been sold, and instruction memos for sales of securities that were commingled with the securities. We recommend the State Treasurer: 3 of 20 State Treasurer – Unclaimed Property Division Special Evaluation • Implement a formal policy for the determination and approval of a “worthless” security. • Ensure all securities are appropriately recorded in Wagers by comparing shares on the statements to shares recorded in Wagers on a regular basis. • Implement procedures to ensure securities are appropriately classified as worthless or with value. Securities that are not in the State’s name, but have a value should be maintained separate from “worthless” securities and should be adequately secured, recorded, and documented in Wagers. Securities that are truly “worthless” should be maintained with the documentation to support the determination and approval that the security is worthless. • Ensure confirmation statements and other documentation to support the sale of securities be appropriately maintained to support the sales. 2. Listing of Stocks Held By State Treasurer and Transferred to UBS During our examination of the physical files at the Unclaimed Property Division, the APA was provided with file folders containing copies of stock certificates. The previous State Treasurer held some stocks internally. In January 2007, the time of the change in State Treasurer, there was a total of $3,375,160 in stocks maintained internally. All of the internally managed stocks were transferred to UBS around May 2007. Copies of the actual stock certificates were made and an electronic listing of the stocks sent to UBS was prepared by the Unclaimed Property Division. We found that Wagers had not been updated for changes to shares due to corporate actions or other activity in which the Unclaimed Property Division had received notice. There were a total of 576 individual certificates on the listing of stocks sent to UBS. After the APA combined the securities that contained the same name or the Committee on Uniform Security Identification Procedures (CUSIP) numbers, we determined there were a total of 391 actual securities on the listing which was sent to UBS. The list of securities that was prepared by the Unclaimed Property Division was compared to Wagers and to UBS to ensure all securities were properly recorded in Wagers and were being held at UBS. We noted the following: See Exhibit C. • 108 securities where the shares on the Unclaimed Property Division list did not agree to the shares on Wagers and at UBS.