SEC Enforcement:

More Actions Needed to Improve Oversight of Disgorgement Collections

GAO-02-771: Published: Jul 12, 2002. Publicly Released: Jul 24, 2002.

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Every year investors lose money to individuals and corporations that violate federal securities laws. One mission of the Securities and Exchange Commission (SEC) is to deter such violations and return lost funds to investors. SEC's primary tool is the disgorgement order, which requires violators to give up money obtained through securities law violations. In order for disgorgement to succeed, SEC must have an effective disgorgement collection program. Although the courts have ordered billions of dollars in disgorgement in the last decade, concerns exist about SEC's success in collecting these funds. For several reasons, SEC's disgorgement collection rate is not an adequate measure of the effectiveness of SEC's disgorgement program. First, while SEC data showed a collection rate of 14 percent for the $3.1 billion in disgorgement ordered in 1995-2001--compared with the 50 percent collection rate GAO reported in its 1994 report--GAO found that the rate varied widely from year to year and was influenced by large individual disgorgement orders. Second, the data used to calculate the collection rate was not reliable because of weaknesses in entering and updating information in SEC's disgorgement tracking database. Third, factors beyond SEC's control, including violators' inability to pay, reduce the likelihood that SEC will be able to collect the full amount of disgorgement ordered. To deprive securities law violators of illegally obtained funds, SEC needs an effective collection program with clearly defined objectives and measurable goals, specific policies and procedures for its staff, and systems to allow management to monitor performance. However, SEC's strategic and annual performance plans do not address disgorgement collection or clarify its priority relative to other activities. SEC has improved its process for recommending receivers and has taken steps to monitor receivers' actions, but lacks a mechanism for tracking receiver fees. In response to concerns noted in a recent internal report, SEC also has improved its waiver recommendation process for disgorgement orders.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In July 2002, SEC issued collection guidelines to its staff and implemented controls (a new case tracking system, CATS 2000), that includes fields for actions taken to collect monies owed. They have hired two new staff in headquarters and designated 10 staff in the regions to act as collection monitors. Each quarter these staff review ongoing cases, including any steps to be taken as part of a Judgment Recovery Plan that is now required. This plan outlines the actions to be taken to collect and provide milestones that the case managers use to ensure that actions are being taken appropriately.

    Recommendation: To improve SEC's ability to ensure that the disgorgement collection program meets its goal of effectively deterring securities law violations and returning funds to harmed investors, the Chairman, SEC, should ensure the prompt implementations of collection guidelines that specify the various collection actions available, explain when such activities should be considered, and stipulate how frequently they should be performed. In addition, SEC should develop controls to ensure that staff follow these guidelines.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: According to SEC Enforcement Division staff, SEC considered contracting out to private collection agencies. However, it learned that the firms that could be contracted with are largely the same firms used by Treasury's Financial Management Service to which they already send their cases for subsequent collection. Instead, they choose to hire specific collection staff and now have three attorneys and three paralegals that conduct collection activities and monitoring of collection activities by investigating attorneys. To further expand their efforts, they have also sought Congressional action to authorize SEC to engage private collection attorneys to handle many of the routine actions that are required as part of collecting debts, such as such as obtaining liens on assets. This authority is included in a bill currently pending before Congress, The Securities Fraud and Restitution Act (H.R. 2179) that was introduced during 2003.

    Recommendation: To improve SEC's ability to ensure that the disgorgement collection program meets its goal of effectively deterring securities law violations and returning funds to harmed investors, the Chairman, SEC, should expeditiously complete the evaluation of options for addressing the competing priorities and increasing workload faced by SEC's Division of Enforcement staff, including assessing the feasibility of contracting certain collection functions and increasing the number of staff devoted exclusively to collections, and take steps to implement any recommended actions.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Not Implemented

    Comments: SEC's annual report still considers the collection rate as the performance measure and the agency is still in the process of determining what a better performance measure would be instead of the collection rate. However, the Enforcement Division has informed the Office of Financial Management that it will address this issue when there is a new strategic plan. (The current plan is for 2004-2009). Also, SEC believes that it will be in a better position to determine the appropriate measures once the agency completes its ongoing project on developing its new case tracking and financial management systems.

    Recommendation: To improve SEC's ability to ensure that the disgorgement collection program meets its goal of effectively deterring securities law violations and returning funds to harmed investors, the Chairman, SEC, should ensure that disgorgement and the collection of disgorgement are addressed in SEC's strategic and annual performance plans, including the development of appropriate performance measures.

    Agency Affected: United States Securities and Exchange Commission

  4. Status: Closed - Implemented

    Comments: As of October 2003, SEC has replaced the Disgorgement Payment Tracking System (DPTS) with a new system, CATS 2000. They have populated it with all cases open as of October 2002, and are in the process of obtaining documentation from attorneys' files to support the information contained in the new system's database for each case. In addition, they have hired two new staff in headquarters and designated 10 staff in the regions to serve as case managers for all the data in the system. Rather than relying on the investigating attorneys, these staff either directly input or oversee administrative staff that input the information about each case using actual court documents. Furthermore, they have created and filled 10 new positions in the regions for staff that act as collection monitors who review collection activities quarterly for all cases.

    Recommendation: To improve SEC's ability to ensure that the disgorgement collection program meets its goal of effectively deterring securities law violations and returning funds to harmed investors, the Chairman, SEC, should develop appropriate procedures to ensure that information maintained in the Disgorgement Payment Tracking System is accurate and current.

    Agency Affected: United States Securities and Exchange Commission

  5. Status: Closed - Implemented

    Comments: SEC's Division of Enforcement, Office of Information Technology, Office of Financial Management, and other SEC offices are in the process of working to make better use of the information they collect on the distribution of disgorgement. Once SEC completes the major overhaul of its case tracking and financial management system, they will be able to track, manage and use this information more efficiently, including tracking and managing receivers fees. The development of the new system (Phoenix) is expected to be complete in early August but the system will not be "going Live" until FY 2007.

    Recommendation: To improve SEC's ability to ensure that the disgorgement collection program meets its goal of effectively deterring securities law violations and returning funds to harmed investors, the Chairman, SEC, should ensure that management uses information on the distribution of disgorgement, including the amounts due to and received by investors and the fees paid to receivers, to monitor the distribution of disgorgement, including the reasonableness of receiver fees.

    Agency Affected: United States Securities and Exchange Commission

 

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