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entitled 'SEC Enforcement: More Actions Needed to Improve Oversight of 
Disgorgement Collections' which was released on July 24, 2002.


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Report to Congressional Requesters:



July 2002:



SEC ENFORCEMENT:



More Actions Needed to Improve Oversight of Disgorgement Collections:



GAO-02-771:



Contents:



Letter:



Results in Brief:



Background:



SECís Reported Collection Rate Is Not an Effective Measure of SECís 

Collection Efforts:



SEC Lacks Strategic Guidance, Clear Policies and Procedures, and an 

Effective Monitoring Mechanism for the Disgorgement Collection Process:



SEC Has Improved Its Process for Selecting and Monitoring Receivers but 

Does Not Have a Central Monitoring System:



SEC Has Taken Steps to Ensure that Disgorgement Waivers Are 

Appropriate:



Conclusions:



Recommendations:



Agency Comments and Our Evaluation:



Appendixes: 



Appendix I: Scope and Methodology:



Appendix II: Comments from the Securities and Exchange Commission:



Appendix III: GAO Contacts and Staff Acknowledgements:



GAO Contacts:



Acknowledgments:



Figures:



Figure 1: Percent of Disgorgement Reported as Waived and Collected by 

SEC, 1995-2001:



Figure 2: Percent of Disgorgement SEC Reported Collecting in the 2 
Years 

After the Orders Were Issued:



Abbreviations:



DPTS: Disgorgement Payment Tracking System:



GPRA: Government Performance and Results Act of 1993, P.L. 103-62:



SEC: Securities and Exchange Commission:



Letter:



July 12, 2002:



The Honorable John D. Dingell

Ranking Minority Member

Committee on Energy and Commerce

House of Representatives:



The Honorable John J. LaFalce

Ranking Minority Member

Committee on Financial Services

House of Representatives:



The Honorable Paul E. Kanjorski

Ranking Minority Member, Subcommittee on Capital Markets,

    Insurance, and Government Sponsored Enterprises

Committee on Financial Services

House of Representatives:



Every year some investors lose money to individuals and corporations 

that violate federal securities laws. Part of the mission of the 

Securities and Exchange Commission (SEC) is to deter such violations 

and, where possible, return lost funds to investors who have been 

harmed. One of SECís primary tools for achieving these goals is the 

disgorgement order, which requires violators to give up money obtained 

through securities law violations. In order for disgorgement to succeed 

both as a deterrent and as a means of returning funds to harmed 

investors, 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 SECís success in collecting these 

funds. We reported on SECís disgorgement collection program in 1994 and 

made several recommendations designed, among other things, to help SEC 

better assess the effectiveness of its disgorgement collection 

efforts.[Footnote 1] That report also included recommendations relating 

to SECís oversight of the receivers appointed by courts to collect and 

distribute disgorged funds. A January 2001 press article reported that 

SECís disgorgement collection rate had declined significantly since our 

1994 report, raising questions about the ongoing effectiveness of SECís 

collection program.[Footnote 2] Finally, a recent report by SECís 

Inspector General[Footnote 3] raised concerns about the process SEC 
uses 

to waive some or all of a disgorgement amount based on the violatorís 

financial condition. At your request, this report focuses on SECís 
current 

disgorgement collection efforts. Specifically, we (1) discuss the 

usefulness of the collection rate as a measure of the effectiveness of 

SECís collection efforts, (2) assess SECís program for collecting 

disgorgement, (3) evaluate the changes in SECís process for 
recommending 

receivers and monitoring their activities, and (4) evaluate the 

improvements in SECís process for recommending waivers of disgorgement 

amounts.



To determine the usefulness of the collection rate as a measure of 

SECís collection efforts, we analyzed information in SECís disgorgement 

database to calculate a single collection rate for 1995 to 

2001[Footnote 4] and individual rates from 1989 until 1999. As part of 

this, we also assessed the reliability of the database by comparing its 

data to that contained in a sample of case files from three SEC 

offices. These files included 35 civil disgorgement cases judgmentally 

selected for a range of characteristics, such as whether collections 

had been successful or whether receivers had been appointed, and the 10 

largest disgorgement orders from 1995 through 2000, which represented a 

significant portion of the total disgorgement amount ordered during 

that period. We also spoke with officials from SEC, private collection 

agencies, and other federal agencies that conduct collection activities 

to learn how various factors can affect SECís ability to collect 

disgorgement and the resulting collection rate. To assess SECís 

disgorgement collection program, we reviewed SECís strategic and annual 

plans to determine how these plans addressed disgorgement collections. 

To identify the actions that SEC staff had taken to collect and 

distribute disgorgement amounts, we reviewed the files from our 

judgmental sample of cases and spoke with the SEC staff familiar with 

these cases. To evaluate the changes in SECís process for recommending 

receivers, we reviewed related policies and procedures and examined 10 

recent receiver recommendations to verify compliance with these 

procedures. To review SEC monitoring of receivers, we examined seven 

cases to determine what actions SEC staff took to oversee receiver 

activities and spoke with three receivers appointed to SEC disgorgement 

cases on the extent to which they interacted with SEC staff. To 

evaluate the improvements in the waiver recommendation process, we 

reviewed 10 cases with partial and full waivers for which final 

judgments had been ordered in fiscal year 2001. Because we judgmentally 

selected our case file sample, the results of our case file reviews may 

not be representative of all SEC disgorgement cases. Appendix I 

contains a full description of our scope and methodology.



Results in Brief:



For several reasons, SECís disgorgement collection rate is not adequate 

as a measure of the effectiveness of SECís 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 we reported in our 1994 report--we found that 

the rate varied widely from year to year and was heavily influenced by 

large individual disgorgement orders. Second, the data used to 

calculate the collection rate was not reliable because of weaknesses in 

the procedures for entering and updating information in SECís 

disgorgement tracking database. These weaknesses resulted in 

inaccuracies in the amounts of disgorgement ordered, collected, and 

waived and, as a result, we could not determine SECís actual 

disgorgement collection rate. Third, factors beyond SECís control, 

including violatorsí 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, SECís 

strategic and annual performance plans do not address disgorgement 

collection or clarify its priority relative to other activities. SEC 

also has not developed performance measures and, therefore, lacks the 

information necessary to evaluate the programís effectiveness. Without 

such guidance and measures, competing priorities and increasing 

workloads could prevent SEC staff from pursuing collection activity to 

the degree desired by the agency. SEC is assessing some ways to address 

this issue, including contracting out some collection activities and 

dedicating more staff to collections, but does not have a time frame 

for completing or taking action on its assessment. Another weakness we 

identified was that SEC did not have in place specific policies and 

procedures that would provide staff with guidance on the type, timing, 

and frequency of collection actions they should consider and help them 

understand what is expected of them. Near the end of our review, SEC 

officials provided us with draft collection guidelines that they plan 

to implement by the end of July 2002, but had not fully developed the 

means they would use to ensure the guidelines are followed. Without 

such guidance and controls, SEC management cannot ensure that 

sufficient and appropriate collection efforts are being made 

consistently across all cases. Finally, SEC management did not have 

reliable, accessible information it could use to ensure that collected 

funds are distributed promptly to investors.



SEC has improved its process for recommending receivers to work on 

disgorgement cases and has taken steps to monitor receiversí actions, 

but lacks a mechanism for tracking receiver fees. Court-appointed 

receivers perform a variety of tasks, such as gathering and liquidating 

a violatorís assets and distributing the funds collected to harmed 

investors. In July 2001, SEC implemented revised guidelines for 

recommending receivers to the court. These guidelines are designed to 

ensure that the recommendations are made objectively and that the 

justification for each recommendation is documented. We reviewed a 

sample of recent receiver recommendations and found that, in general, 

the procedures were being followed. We also found that SEC staff were 

monitoring receiversí activities and gathering enough information to 

assess receiversí fee applications. However, SEC does not have a system 

for tracking individual case data on receiversí fees, as we recommended 

in our 1994 report. Some receiverís duties can be complex, and 

consequently their fees can sometimes exceed half the funds collected. 

Tracking this information could improve managementís ability to 

identify cases in which receiverís fees are high. In turn, identifying 

these cases would make it easier to take prompt action to minimize 

costs, so that harmed investors receive as much money as possible.



In response to concerns noted in a recent internal report, SEC also has 

improved its waiver recommendation process for disgorgement orders. An 

audit completed in June 2000 by SECís Inspector General found that SEC 

could improve its ability to provide reasonable assurance that the 

violators were unable to pay the entire disgorgement amount or that all 

assets had been identified. The Inspector General recommended that SEC 

improve its procedures for verifying violatorsí financial information. 

These improvements included using databases and analyzing insurance 

policies, tax returns, and passports to identify possible leads for 

detecting fraudulent information or hidden assets. In October 2000, SEC 

implemented new guidelines that incorporated the improvements 

recommended by the Inspector General. We reviewed a sample of recent 

waiver recommendations and found that SEC staff were following the 

revised guidelines.



This report includes recommendations to the SEC Chairman to improve 

SECís ability to ensure the effectiveness of its disgorgement 

collection program. These recommendations include (1) ensuring the 

reliability of disgorgement data, (2) delineating the objectives of the 

disgorgement program and including measures of its effectiveness in 

SECís strategic and annual plans, (3) addressing the competing 

priorities within SECís Division of Enforcement, (4) finalizing 

collection guidelines, and (5) monitoring the distribution of 

disgorgement. We received comments on a draft of this report from the 

director of SECís Division of Enforcement. SEC agreed with most of the 

reportís conclusions and recommendations and stated that the agency is 

already implementing some of the most important recommendations. SECís 

comments are discussed in greater detail at the end of this letter, and 

its written comments are reprinted in appendix II.



Background:



As the organization charged with responsibility for overseeing U.S. 

securities markets at the federal level, SECís mission is to protect 

investors and ensure fair and orderly markets. Within SEC, the Division 

of Enforcement is responsible for investigating possible violations of 

the securities laws, litigating against violators in federal civil 

courts and administrative proceedings, and negotiating settlements. 

When an investigation reveals a possible violation, SEC can seek a 

range of sanctions and remedies, including disgorgement. When seeking 

disgorgement, SEC staff attempt to recover the amount of illegal 

profits or misappropriated funds as a way of ensuring that securities 

law violators do not profit from their illegal activities. When 

possible, SEC also attempts to return these funds to any investors 

harmed as a result of the violation. When it is not economically 

practical or efficient to locate and notify investors, the collected 

amounts are transferred into the general fund of the U.S. Treasury. 

Disgorgement sanctions are imposed against violators involved in 

activities such as insider trading, investment adviser fraud, market 

manipulation, and fraudulent financial reporting. Until 1990, SEC could 

obtain a disgorgement sanction only by obtaining a court order from a 

civil suit filed in federal district court. However, in 1990, Congress 

gave SEC the authority to impose disgorgement sanctions in its 

administrative proceedings through the Securities Enforcement Remedies 

and Penny Stock Reform Act of 1990. The majority of disgorgement orders 

result from suits filed in federal court.



The amount to be disgorged in civil and administrative proceedings is 

based on the amount of the illegal gain, but SEC has discretion to 

waive all or part of a disgorgement claim. Waivers are granted based on 

a violatorís inability to pay and are typically granted in settled 

matters. If SEC believes that a violator is able to pay but refuses to 

make payments, it can take actions to compel the violator to pay, such 

as requesting that the court hold the violator in contempt for failure 

to pay. In addition, SEC may request that the court appoint a receiver, 

generally a private sector lawyer, to perform certain tasks, such as 

obtaining and managing a violatorís assets and overseeing the 

distribution of funds to harmed investors. Receivers are paid out of 

the funds collected to pay the disgorgement order.[Footnote 5] After 

SEC exhausts all practical collection actions, the agency is required 

to transfer its uncollected debt to the Treasury Departmentís Financial 

Management Service for final collection efforts.



As we have stated in two recent reports, SEC faces several challenges 

in fulfilling its mission.[Footnote 6] U.S. securities markets have 

grown tremendously and become more complex and international, 

increasing the volume and complexity of SECís workload. SECís staff 

resources have not increased at a similar rate. For example, between 

1991 and 2000, Division of Enforcement staff devoted to investigations 

increased 16 percent, from 414 to 482 staff years, while the number of 

cases opened increased 65 percent, from 338 to 558. In addition, the 

number of cases pending at the end of the year increased 77 percent, 

from 1,264 in 1991 to 2,240 in 2000. As a result, SEC has been forced 

to become selective in its enforcement activities and has experienced 

an increase in the time required to complete certain enforcement 

investigations. In addition, SEC has been experiencing a staffing 

crisis that has left it with a large number of less experienced staff. 

For example, from 1998 to 2000 over 1,000 employees, or about one-third 

of all staff, left SEC, and in 2000 its overall turnover rate averaged 

15 percent--more than twice the rate for comparable positions 

governmentwide. SECís Division of Enforcement has, likewise, had 

substantial turnover, with 89 professional staff leaving the division 

during 2000 and 2001, which was about 16 percent of the 553 staff in 

the division in 2001.



SECís Reported Collection Rate Is Not an Effective Measure of SECís 

Collection Efforts:



SECís current collection rate is limited as a measure of the 

effectiveness of SECís collection program for several reasons. First, 

although its collection rate appeared to decline from prior periods, we 

found that SECís varying success in collecting large individual 

disgorgement orders caused the rate to differ significantly over time. 

Second, we found that weaknesses in the processes SEC staff used to 

enter and update the Disgorgement Payment Tracking System (DPTS), which 

tracks SECís disgorgement collections, have created errors that 

prevented us from determining the actual disgorgement collection rate. 

Finally, the collection rate is less useful to measure SECís program 

because factors beyond SECís control reduce the likelihood that the 

agency will be able to collect all disgorgement ordered.



SEC Data Show That a Large Amount of Disgorgement Is Not Collected, but 

the Collection Rate Varied Widely:



As recommended in our 1994 report, SEC now collects aggregate data on 

the amount of disgorgement ordered, waived, and collected. Our analysis 

of SEC data found that, as of November 2001, SEC apparently had 

collected approximately $424 million, or 14 percent, of the $3.1 

billion in disgorgement that was ordered from 1995 through 2001 (fig. 

1).



Figure 1: Percent of Disgorgement Reported as Waived and Collected by 

SEC, 1995-2001:



[See PDF for image]



Note: Collection data are current as of November 16, 2001.



Source: GAO analysis of SEC data.



[End of figure]



However, our analysis also found that SECís collection rate varied over 

time and was heavily influenced by large individual disgorgement 

orders. According to SEC data, the disgorgement collection rate varied 

greatly from year to year. SEC data show that between 1990 and 1999 SEC 

was able to collect between 2 and 84 percent of the disgorgement 

amounts owed, not including amounts waived (fig. 2).



Figure 2: Percent of Disgorgement SEC Reported Collecting in the 2 

Years After the Orders Were Issued:



[See PDF for image]



Note: We calculated the collection rate for each fiscal year by 

totaling any collections made on disgorgement ordered during each year. 

To ensure that the amount of time for collection was comparable for 

each of these years, we totaled the amount of disgorgement collected 

within a 2-year period following the date of each individual order.



Source: GAO analysis of SEC data.



[End of figure]



An analysis of these collection rates shows that SECís success in 

collecting large individual disgorgement orders can greatly influence 

the collection rate. For example, figure 2 shows that in 1990 SEC 

collected approximately 75 percent of the disgorgement ordered (not 

including waived amounts) in the 2 years after the orders were issued 

but only 17 percent of the disgorgement ordered in 1991. However, our 

analysis found that approximately $400 million of the $427 million 

collected on disgorgement ordered in 1990 came from a single payment 

made by one violator. Excluding this case, the reported collection rate 

for 1990 would have been approximately 15 percent. Similarly, SECís 

reported collection rate of 84 percent for 1994 included a disgorgement 

order of $939 million for a single violator, the majority of which was 

collected in the 2 years following the order. Excluding this single 

case, the collection rate for 1994 would have been 23 percent.



Similarly, comparing the overall 14 percent collection rate for 1995 to 

2001 to the rate we reported in 1994 also is not meaningful as a result 

of the impact of these large cases. In our 1994 report, we calculated 

that SEC had collected 50 percent of the $2 billion of disgorgement 

ordered from 1987 to April 1994. However, if the $400 million 1990 case 

cited above is excluded from the collection rate for 1987 to 1994, the 

rate for that period would have been about 38 percent. As a result of 

the impact that just a few cases can have on SECís collection rate, 

using this rate as a measure of changes in the overall effectiveness of 

SECís collection efforts can be misleading.



Data Entry and Update Procedures Have Not Ensured Accurate or Current 

Information:



Another reason that we were unable to use SECís reported collection 

rate as a measure of SECís collection efforts is that the data used to 

calculate that rate are unreliable. According to standards issued by 

GAO,[Footnote 7] appropriate internal controls are necessary to ensure 

that data are accurate and complete. In addition, data about events 

should be promptly recorded so that they maintain their relevance and 

value to management. However, weaknesses in SECís procedures have 

resulted in unreliable data in its disgorgement database. As part of 

our review, we selected a sample of 57 cases and compared information 

from SEC case files and other documents to entries in DPTS. We found 

that 18 cases, or approximately 32 percent, contained at least one 

error in the amount ordered, waived, or collected, or in the status of 

the case or of the individual violators. Overall, for the 57 cases that 

we reviewed, DPTS data showed that SEC had collected around $25 

million, or approximately 4 percent of the $597 million in disgorgement 

ordered, not including amounts waived. However, after correcting for 

the inaccuracies we identified in our review, we found that SEC had 

actually collected around $55 million, or approximately 11 percent of 

the disgorgement ordered, not including the amounts waived. Because we 

judgmentally selected the cases we reviewed, this error rate cannot be 

projected beyond our sample.



SECís process for entering data on disgorgement orders into DPTS did 

not ensure the accuracy or completeness of that data. We found that the 

sources used as a basis for entering data into DPTS did not always 

provide the most accurate information. SEC staff in the Office of the 

Secretary who entered the data into DPTS relied heavily on SEC 

litigation releases that, according to the staff, may not contain all 

the details of a disgorgement order. The staff also told us that they 

do not independently verify the information in the litigation releases. 

Further, the staff told us that the payment dates recorded in DPTS 

might not be accurate, because staff used the day entry was made as the 

payment date if no other date was specified. Finally, we found that it 

was awkward for staff to accurately record information for individual 

violators when disgorgement orders were issued to multiple 

violators.[Footnote 8] In these instances, payments made by one 

violator may subsequently reduce the amount all the violators owe. 

However, the DPTS system does not provide a way to easily enter and 

track the amounts owed under joint and several liability cases. 

Instead, staff input the total amount of the disgorgement judgment 

under one violator and enter a $0 balance for the others, with a 

notation indicating that each violator is jointly and severally liable 

with other violators. Payments are recorded under the name of the 

selected violator, not necessarily the violator making the payment, and 

a note is made in the system as to which violator had paid. SEC staff 

said that they entered the data in this way to avoid overstating the 

amount of disgorgement ordered and paid. SEC officials told us that 

they will revise their procedures for entering information in cases 

with joint and several liability in order to more clearly present 

information related to individual violators.



Of the cases we reviewed, five contained errors that appeared to result 

from the use of incomplete or inaccurate information as a source of 

data for DPTS. For instance, in one case with a disgorgement order of 

over $300,000, the entire disgorgement amount was waived at the same 

time the disgorgement was ordered in October 1997. But as of November 

2001, DPTS did not show that any amount had been waived. In another 

case involving 10 violators, the attorney responsible for the case told 

us that 9 of the violators were jointly and severally liable for a 

disgorgement order of around $800,000. However, several litigation 

releases contained information on some, but not all, of the violators. 

As a result, a disgorgement order amount was recorded for one violator 

from each litigation release, resulting in an overstatement of the 

total amount of disgorgement ordered by approximately $1.6 million, or 

about 200 percent.



We also found that SECís process for updating the information in DPTS 

may result in the information not being current. SECís Office of the 

Secretary sends out a report with the details of each case three times 

a year and asks that responsible SEC staff correct any inaccuracies and 

update the information. However, the staff who send out the report said 

that they have no assurance that each office has carefully reviewed the 

report and noted that some offices have not been timely in returning 

their reports. Thus the time lag in entering information into DPTS can 

be about 4 or 5 months, and the information in DPTS may not be 

current.[Footnote 9]



Of the cases we reviewed, 14 contained errors that appeared to be 

caused by information not being updated in a timely manner. For 

example, in one case with a disgorgement order of around $18 million, 

court documents showed that as of late 1999, over $3 million had been 

collected and distributed to investors. However, as of November 2001, 

DPTS did not show that any money had been collected. In another case, a 

disgorgement order of over $5 million was discharged as part of 

bankruptcy proceedings in 1998, but this fact was not recorded in DPTS 

until at least October 2001.



Without reliable data that is accurate and up to date, SEC management 

is limited in its ability to assess its collection program--for 

instance, in its efforts to determine the reasonableness of the amount 

of disgorgement waived or collected in individual cases or the overall 

effectiveness of its collection program. In addition, SEC cannot 

provide Congress with accurate statistics related to its disgorgement 

collection activities.



Factors Beyond SECís Control Make It Unlikely That SEC Will Collect All 

Disgorgement:



Another limitation in the adequacy of the collection rate as a measure 

of the effectiveness of SECís disgorgement collection efforts is that 

factors beyond SECís control limit its ability to collect the full 

amount of disgorgement ordered in some cases. Disgorgement orders are 

based on all the funds obtained through violations and do not take into 

account the violatorsí ability to pay.[Footnote 10] That is, the amount 

of disgorgement ordered represents the amount of illegal profits or 

misappropriated funds rather than the amount the violator might be able 

to pay. For example, in one case we reviewed, SEC obtained a 

disgorgement order for around $670,000, even though at the time of the 

order SEC knew the violator did not have any assets. SEC did not 

collect any money from the violator. According to SEC officials, 

although SEC may not collect the entire amount of disgorgement ordered 

in such cases, disgorgement can be a deterrent to future violations and 

limit the violatorís ability to raise funds to engage in new frauds.



This contrasts with the way SEC seeks fines against violators of 

securities laws. When seeking fines, SEC can take into account a 

violatorís ability to pay or other factors such as the severity of the 

violation and the degree to which the violator cooperates with SEC. For 

example, the court can state that a fine is merited but not levy any 

amount based on the violatorís lack of ability to pay. According to SEC 

officials, the fact that fines are assessed this way is one reason why 

SECís collection rate is significantly higher for fines than for 

disgorgement; in a recent report, GAO calculated the collection rate 

for fines at approximately 91 percent.[Footnote 11] SEC officials also 

said that they are more successful in collecting fines than 

disgorgements for at least two other reasons. First, disgorgement 

orders are often much higher than fines, and the larger amounts are 

more difficult to collect. Second, many violators fined by SEC are 

current members of the securities industry and are motivated to pay 

their fines in order to maintain their reputation within the industry. 

But many of the violators who are ordered to pay large disgorgement 

orders are either not members of the securities industry or have no 

desire to remain so.



Securities law violators can lack the ability to pay for a variety of 

reasons. In many cases, for instance, violators have few or no assets 

left and may have used the proceeds of their illegal activity on 

nonrecoverable expenses. For example, in 21 of 37 cases we reviewed in 

which violators did not pay all the disgorgement ordered, SEC staff 

said that disgorgement was not collected because the violators had 

already spent the money on personal or business expenses that SEC could 

not recover. In one case we reviewed, the violator had spent $175,000 

on custom-made furniture, which the caseís court-appointed receiver was 

able to sell for only about 10 percent of its original cost. In 

addition, disgorgement orders may be obtained against defunct 

companies. In two of the cases we reviewed, disgorgement orders were 

obtained against shell companies, one for $1.6 million and one for $1.5 

million. In each case, SEC staff knew that the company was defunct and 

most likely did not have any assets but obtained the disgorgement order 

to prevent the company from becoming involved in future fraudulent 

activities. Further, a violatorís assets may already have been used to 

pay other judgments, leaving little for SEC to collect. In one case 

involving a disgorgement judgment of $147 million, all the violatorís 

assets--around $40 million--were used to pay investors through private 

class action claims in a Securities Investor Protection Act case and a 

Chapter 11 bankruptcy case.[Footnote 12]



Another reason that violators can lack the ability to pay is that they 

have little earning capacity. In some cases, violators may be unable to 

satisfy their disgorgement debt because they declare bankruptcy or are 

incarcerated. For example, for the period 1995 through 2000 at least 5 

of the 10 violators with the largest disgorgement orders were 

incarcerated because of their fraudulent activities. Also, violators 

may be defunct companies with no prospects for future income. For 

example, the two shell companies in the example noted above were 

defunct at the time of the disgorgement judgment and had no prospects 

for future operations or income. In other cases, violators may have 

been banned from further participation in the securities industry, 

depriving them of their source of income. According to SEC staff, in 

many cases in which a violator has been ordered to pay disgorgement, 

SEC also bars the violator from working in the securities industry.



SEC Lacks Strategic Guidance, Clear Policies and Procedures, and an 

Effective Monitoring Mechanism for the Disgorgement Collection Process:



Although disgorgement is intended to help deter fraud by forcing 

violators of the securities laws to return illegal profits, we found 

weaknesses in SECís disgorgement collection program. First, SEC lacks 

clearly defined strategic objectives and measurable goals for its 

collection program. SECís strategic and annual performance plans, 

prepared under the Government Performance and Results Act 

(GPRA),[Footnote 13] do not address the importance of disgorgement 

collections or provide measures that would help SEC management monitor 

its staffís collection efforts. Without such guidance and measures, 

competing priorities and increasing workload could prevent SEC staff 

from pursuing collection activities to the degree desired by the 

agency. Second, SEC lacks the specific policies and procedures that 

would help maximize collection by ensuring that all appropriate actions 

are taken to collect disgorgement--for example, the types of collection 

actions staff should take and the timing of specific actions. Third, 

SEC does not have systems with accurate or complete information for 

monitoring whether staff are taking appropriate, prompt collection and 

distribution actions.



SEC Has Not Strategically Addressed Disgorgement Collection Priority In 

Light of Competing Priorities and Increased Workload:



Although its staff consider disgorgement collection to be an important 

means of deterring fraud, SEC had not clearly defined the priority that 

should be placed on disgorgement collection or established performance 

measures to monitor collection efforts. Currently, SEC Division of 

Enforcement staff must balance their disgorgement collection efforts 

with various other priorities and a workload that in recent years has 

been increasing faster than their resources. SEC has begun some efforts 

to assess alternatives means of reducing the conflicting demands on its 

staff, such as by contracting out collections or taking other actions, 

but these assessments have not been completed.



SEC Strategic Plans Do Not Address Disgorgement Priority or Provide 

Effectiveness Measures:



Under GPRA, federal agencies are held accountable for achieving program 

results and are required to clarify their mission, set program goals, 

and measure their performance in achieving those goals. According to 

the Office of Management and Budget and GAO guidance related to GPRA, 

effectively achieving program results requires each agency to create a

strategic plan that articulates the agencyís mission and includes long-

term goals.[Footnote 14] To supplement the overall strategic plan, 

agencies are also required to prepare annual performance plans that 

specify goals and measures and that describe strategies to achieve 

results. Such goals and measures help managers determine whether the 

agencyís programs are achieving desired results.



According to SECís strategic and annual performance plans, deterring 

fraud is an important part of protecting investors. SEC officials told 

us that disgorgement is an effective deterrent because it deprives 

violators of their illegal profits. However, SECís strategic and annual 

plans do not clarify the priority disgorgement collection should have 

in relation to SECís other goals. In addition, the plans do not 

establish performance measures for disgorgement collection. According 

to GPRA, agencies also are to establish performance indicators that can 

be used to measure or assess the relevant outputs, service levels, and 

outcomes of each program activity.[Footnote 15] SEC has not created the 

measures needed to assess the effectiveness of its disgorgement 

collection program or its deterrent effect. Such measures could include 

the percentage of disgorgement funds returned to investors, the 

timeliness of collection actions, or the number of violators ordered to 

pay disgorgement who go on to commit other violations.



SECís Competing Priorities and Increasing Workload Create the Risk That 

Staff Cannot Make Sufficient Collection Efforts:



Without a well-defined strategy that clearly communicates the role and 

relevance of disgorgement in relation to SECís other goals--and without 

performance measures that assess the effectiveness of collection 

activities--the competing priorities and increasing workload faced by 

SEC staff create the risk that those staff will not be able to pursue 

collection activities to the level desired by the agency. The staff in 

SECís Division of Enforcement responsible for collecting disgorgement 

amounts have multiple additional responsibilities. Depending on the 

office to which they are assigned, they might also investigate 

potential violations of the securities laws, recommend SEC action when 

violations are found, prosecute SECís civil suits, negotiate 

settlements, and conduct collection activities for fines SEC levies.



SEC staff told us that the agencyís limited resources force them to 

choose between the competing priorities of collecting disgorgement and 

taking direct action to stop ongoing fraud, and that they choose to 

devote more effort to stopping fraud than to collections. Similarly, 

SEC officials said that if a large, complex case requires SECís 

immediate attention, the agency shifts its resources to focus on that 

case. In such situations, collection actions on other cases are a 

secondary priority. As a result, a risk exists that SEC staff will not 

be able to pursue collection activities to the degree desired by the 

agency. SEC officials and staff also told us that, in most cases, 

investors are best served if the agency concentrates more of its 

resources on stopping ongoing fraud than on collecting disgorgement, 

because stopping ongoing fraud keeps investors from losing more money. 

Similarly, a former director of the Division of Enforcement stated that 

SECís primary responsibility is investor protection, not collecting all 

the money from fines and disgorgement.



SEC Is Considering Actions to Address the Competing Priorities Faced by 

Its Staff:



SEC is considering some actions to help address the challenges it faces 

in ensuring that staff have enough time to collect disgorgement but has 

yet to finalize any plans. For example, SEC is exploring contracting 

out a portion of its collection work to private collection agencies. 

Officials from the National Association of Securities Dealers 

Regulation, Inc., which began contracting out its collection activities 

in June 2001, told us that they saw contracting out as a way to help 

ensure that effective collection actions are taken. Contracting out 

allows the National Association of Securities Dealers Regulation, Inc. 

to use its resources to hire litigators and investigators rather than 

collection attorneys.[Footnote 16] Using external organizations to 

conduct collection activities would help alleviate the problem of 

competing priorities facing SEC staff and allow them to focus primarily 

on stopping ongoing fraud. As of the time of this report, SEC officials 

told us that they had spoken with several private collection agencies 

and were in the process of examining the legal issues involved with 

delegating some collection responsibilities to these agencies.



Another step SEC has considered is increasing the number of staff 

dedicated to collection activities. In 1999, SEC created a position for 

an attorney dedicated to collections. This attorney and one paralegal 

are the only Division of Enforcement staff devoted solely to collection 

activities. SEC officials told us that they would like to expand the 

number of staff devoted exclusively to collections but added that they 

did not feel they could do so because they could not afford to take 

resources away from other areas.



A recent initiative by SECís Chairman and commissioners may also affect 

how staff balance their priorities. In November 2001, SEC announced an 

initiative called real-time enforcement,[Footnote 17] which is intended 

to provide quicker and more effective protection for investors and 

better oversight for the markets with SECís limited enforcement 

resources. To achieve this, SEC intends to take action sooner than it 

has in the past. For example, the agency plans to:



* obtain emergency relief in federal court to stop illegal conduct more 

expeditiously;



* file enforcement actions more quickly, thereby compelling disclosure 

of questionable conduct so that the public can make informed investment 

decisions; and:



* impose swifter and more serious sanctions on those who commit 

egregious frauds, repeatedly abuse investor trust, or attempt to impede 

SECís investigatory processes.



Such prompt enforcement action may help SEC collect a greater amount of 

disgorgement by preventing violators from spending or hiding their 

assets. However, SEC officials also told us that such actions require 

significant staff resources, and may reduce the amount of resources 

that can be devoted to collection actions in other cases or later on in 

the same case.



SECís Lack of Clear Collection Policies and Procedures Hinders 

Management Oversight of Staff Collection Activities:



SECís overall disgorgement collection program lacks clear policies and 

procedures that specify the actions that staff could take to collect 

disgorgement. According to federal internal control 

standards,[Footnote 18] policies and procedures should be designed to 

help ensure that managementís directives are carried out. During the 

period covered by our review, SEC did not have in place such policies 

and procedures for disgorgement collections. Instead, the lead 

attorneys on the individual cases determined what actions should be 

taken, with supervisors reviewing the decisions. Supervisors told us 

that they met periodically with the lead attorneys to review the 

collection activities already taken and to determine whether further 

actions were needed.



However, SEC management cannot readily determine whether staff take 

appropriate collection actions in all cases without clear collection 

procedures outlining which actions should be taken and when. SEC staff 

can take a wide range of collection actions, depending on the facts and 

circumstance of the case. For example, they can file a contempt action, 

seek to obtain liens on a violatorís property, or seek to have a 

violatorís wages garnished. Our review of the actions taken in 

individual cases reflected such a range of actions. In some cases, we 

could not determine what actions had been taken, because staff had left 

the agency or actions were not documented in the files we reviewed. In 

these cases, we relied on current staff to tell us what actions had 

been taken. Although collection actions must be tailored to individual 

cases, having clear guidance on the actions suited to different 

developments in a case would assist SEC management in ensuring that 

sufficient and appropriate efforts are made. This type of consistency 

is particularly important given SECís relatively high staff turnover 

rate.



Collection policies that specify the timing and frequency of actions 

would also assist SEC management in establishing clear expectations on 

how the program should be managed. For example, we identified two cases 

in which certain collection and distribution actions appeared to have 

been delayed. In one case, the violator made the final payment in April 

2000, but as of February 2002 a plan to distribute the assets had not 

been finalized. SEC staff on the case cited internal disagreement and 

staff turnover as reasons for the delay. In another case, little action 

was taken for about 14 months, during which time a new attorney was 

assigned to the case. The new attorney then unsuccessfully filed for 

contempt for nonpayment, but another 16 months elapsed with little 

activity. SEC ultimately transferred the case to the Treasury 

Departmentís Financial Management Service without collecting any money. 

The lack of guidance that specifies when to pursue certain collection 

actions, and how often, affects staff as well as management, since 

staff are not held accountable to any clear standards. And SEC 

management cannot determine whether staff take all collection actions 

promptly, which increases the risk that staff could miss opportunities 

to maximize collections.



SEC officials agreed that such guidance is needed, and in June 2002 

provided us with draft collection guidelines that they plan to 

implement by the end of July 2002. The draft guidelines detail the 

types of actions that should be considered and give specific timeframes 

for their completion. If implemented, the guidelines would address the 

concerns noted above. At the time of our review, SEC had not finalized 

a means for ensuring that staff comply with the guidelines, such as a 

checklist that could be placed in each case file indicating the actions 

taken, how frequently, and why.



SEC Management Does Not Have a System to Monitor Disgorgement 

Collections:



At the time of our review, SEC did not have in place a system that 

would allow management to monitor activities to ensure that all 

appropriate actions are promptly taken. According to federal internal 

control standards, internal controls should assure not only that 

ongoing monitoring is a part of normal operations but also that it 

assesses the quality of performance over time. In our 1994 report, we 

recommended that SEC enhance DPTS to include aggregate and individual 

information on disgorgement cases. SECís current system for tracking 

disgorgement case information does not provide the accurate data SEC 

managers need to monitor collection efforts and identify cases that 

require their intervention.



We also found that SEC was not using a monitoring system to oversee the 

distribution of disgorgement collected. In our 1994 report, we 

recommended that DPTS include the amounts of disgorgement distributed 

and the recipients. Currently, information on disgorgement funds 

available for distribution to investors is maintained in case files 

that are manually maintained and, therefore, cannot be easily analyzed 

or aggregated. SEC officials told us that aggregating this information 

would not help them collect or distribute funds. But because SEC cannot 

easily aggregate information on the distribution of funds, SEC staff 

could not tell us how much of the disgorgement collected was paid to 

investors or to the Treasury. As a result, neither SEC nor we could 

tell to what extent the disgorgement program was returning funds to 

harmed investors.



Relying on individual SEC staff or their supervisors to monitor 

distribution efforts is not always adequate. Of the 18 cases we 

reviewed in which disgorgement had been collected in full, we found two 

cases in which the disgorgement collected had not been promptly 

distributed. In one case, the violatorís final disgorgement order 

payment occurred in July 2001, but as of March 2002, the funds had not 

been distributed, and SEC staff were still in the process of obtaining 

bids from potential receiver candidates. The attorney in charge 

attributed this 9-month delay to his heavy workload and trial 

responsibilities. In another case, approximately $100,000 collected 

through criminal restitution was transferred to SECís Office of the 

Comptroller and was to be distributed by the court-appointed receiver. 

However, SEC staff responsible for the case did not realize that the 

Office of the Comptroller had received the funds from the criminal 

restitution action until the case was examined in preparation for our 

review. As a result, this amount was not included in the final 

distribution made by the receiver. SEC staff responsible for the case 

stated that this was an oversight on the part of both the receiver and 

SEC. However, they also noted that the case was unusual in that the 

judge had required SEC to oversee not only disgorgement funds from 

SECís case but also restitution funds recovered as a result of the 

criminal case.



Without reliable, accessible data, SEC is limited in its ability to 

monitor whether collection activity is taking place and whether 

collected funds are promptly distributed. More importantly, without 

using a system to manage the program, SEC management is unable to 

assess the extent to which its staff are returning funds to defrauded 

investors.



SEC Has Improved Its Process for Selecting and Monitoring Receivers but 

Does Not Have a Central Monitoring System:



SEC has improved its process for selecting individuals to recommend as 

court-appointed receivers. In addition, although SEC is not responsible 

for supervising receivers, its staff are taking actions to monitor the 

cases that have receivers. However, SEC still lacks a mechanism for 

tracking information such as the fees receivers charge and the amounts 

they collect, limiting managementís ability to ensure that as much 

money as is reasonably possible is returned to harmed investors.



SEC Has Improved Its Process for Selecting Individuals to Recommend As 

Receivers:



Receivers are used on SECís cases to perform tasks such as gathering 

and liquidating violatorsí assets and distributing funds to harmed 

investors. SEC usually selects a candidate and then recommends the 

individual for receivership to the court for final approval. According 

to an SEC official, some courts accept SECís recommended receiver, but 

other courts prefer to appoint a receiver on their own. Because the 

court appoints the receivers and ultimately defines their duties, 

receivers are answerable to the judge of the court rather than to SEC.



As court-appointed fiduciaries, receivers are subject to the same 

standards of trust and confidence as other fiduciaries, and need to be 

selected as impartially as possible.[Footnote 19] In 1994, we examined 

whether SEC had procedures and management controls for selecting 

receivers in response to concerns that former SEC employees were 

favored in the receiver selection process. We reported that SEC had no 

formal policies or qualifying standards in place to ensure that 

receivers were selected impartially, and we were unable to determine 

how many receivers were former SEC employees.



As we recommended, SEC implemented guidelines in July 2001 for 

selecting candidates for receiverships that appear to address the 

concerns raised in our 1994 report. The guidelines have shifted 

responsibility for choosing receivers from the SEC attorneys themselves 

to a committee of higher-level managers. When receivers are needed, SEC 

must now obtain written proposals from at least three candidates 

detailing the applicantsí experience, fees, and staffing and 

operational plans. The candidatesí proposals are then submitted to a 

three-person committee for final evaluation and selection. The 

committee is composed of the chief or deputy chief litigation counsel; 

the investigating or litigating attorney on the case; and an associate 

director, regional director, or district administrator.



SEC has also formalized criteria to use when evaluating candidatesí 

proposals. These criteria include costs and the candidateís reputation, 

experience in securities regulations, and past service as a receiver on 

another SEC matter. The guidelines state that the committee should 

avoid selecting the same person repeatedly for appointments as a 

receiver, so as to avoid the appearance of favoritism. The committee 

must also justify its selection in writing. The names of receivers 

selected are entered into a database that can be used to identify 

receiver candidates on short notice.



We reviewed 10 recent receiver recommendations and found that SEC was 

generally following the guidelines for selecting receivers. In every 

case we reviewed, the three-person committee had evaluated at least 

three candidates and documented the reasons for its selection. In 

addition, all the cases contained summary information on the 

candidatesí backgrounds, and nine cases contained fee information from 

at least two candidates. We found that most of the individuals selected 

as receivers--7 of the 10 selected--were not former SEC employees. In 

cases in which SEC had recommended former employees, documentation was 

provided justifying the nominations. In two such cases, SEC recommended 

former employees because they had the most experience relevant to the 

job. In one case, we could not tell whether the candidate was a former 

SEC employee, but SEC documented the candidateís extensive relevant 

experience.



SEC Does Not Directly Supervise Receivers but Does Monitor Their 

Activities:



SEC assists the court in monitoring receivers, helping to ensure that 

they adhere to their responsibilities as court-appointed fiduciaries 

tasked with protecting recovered funds and complying with court orders. 

In our 1994 report, we found that SEC did not have adequate oversight 

over receivers, and we could not tell whether SEC staff were adequately 

reviewing receiver fee applications. We recommended that SEC establish 

guidelines for monitoring court-appointed receivers.



Although SEC still has not established such guidelines, we found that 

it has taken steps to monitor receiversí actions. Staff in SECís 

Division of Enforcement told us that they monitor court-appointed 

receivers by working closely with them and by asking them to consult 

with SEC before taking any major actions, such as seizing or selling 

assets. In one case we reviewed, we saw documentation of phone 

conversations between SEC and the receiver concerning the receiverís 

distribution plan and case status. In another case, we saw 

correspondence from the receiver regarding the progress made and the 

results of disposed assets. We also spoke with three receivers who work 

on SEC cases and it appeared that SEC was working closely with them to 

monitor their actions. One receiver we spoke with said that he 

regularly interacts with SEC while working on a case in order to avoid 

disputes about his handling of the case and fees. He added that 

disputes over how he handles a case could cost his firm time and money 

that are often not reimbursable under the receivership. Another 

receiver we spoke with said that while working on an SEC case, he is in 

frequent communication with the SEC attorney on the case, whom he found 

to be available, responsive, aggressive, and concerned about the 

progress of cases.



We also found that SEC staff had reviewed the receiver fee applications 

and obtained additional information needed to assess the application. 

Reviewing the applications serves as an important control for ensuring 

that as much money as possible is returned to investors, as receivers 

are compensated for their services from the amounts collected in the 

case. Although the courts approve receiversí fee applications, SEC 

attorneys review the applications beforehand and comment on the 

reasonableness of the fees. In the absence of guidelines, SEC attorneys 

use their knowledge of the facts and circumstances of a case to 

determine whether fees are reasonable. One senior SEC staff member told 

us that he reviews fee applications by considering the exact tasks the 

receivers and their staff have performed, assessing the need for 

specialized staff, and comparing the fees to fees for similar services 

in the same geographic area. During our review, we saw documentation 

showing that the attorney in one case had examined the number of staff 

the receiver hired to complete necessary tasks, assessed the necessity 

of the tasks, and examined the appropriateness of the receiverís 

expenses. In the same case, we also saw documentation showing that the 

attorney had requested and examined information such as record of hours 

worked in order to assess the reasonableness of the fees. In another 

case, SEC had noted in a motion filed in support of the receiverís fee 

application that the receiver apparently was not billing for all the 

work performed. In a third case, one attorney told us that after 

monitoring the rising costs of the fee applications, the SEC attorney 

had taken over some of the receiverís duties, such as preparing a 

distribution plan, to minimize the receiverís expenses and fees.



SEC Does Not Centrally Monitor Information on Receiver Fees:



We found that SEC was not using a centralized system to monitor 

receiver fees. Receivers are compensated for their services from the 

amounts collected, so when receiversí fees are high, less money is 

available for distribution to investors. In our 1994 report, we found 

that SEC did not track information on receivers, limiting its ability 

to assess the effectiveness of receivers and to monitor trends in 

costs. We recommended that SEC collect such information in a 

centralized management information system. However, SEC staff told us 

that they do not track this information in DPTS or any other system 

because it would not help with their collections efforts. Currently, 

receiver data on the amount recovered, costs and expenditures, and the 

amount disbursed to investors is accessible through case files that are 

manually maintained.



However, tracking receiver data through a centralized management 

information system could improve SECís oversight of all cases. Managers 

would be able to identify specific instances in which receiversí fees 

are high or are absorbing a large share of the funds available for 

distribution and, if appropriate, take prompt action to minimize these 

costs. While we found no evidence in the cases we reviewed that 

receiver fees were excessive, we did find that receiversí fees have 

sometimes amounted to half or more of the disgorgement funds collected 

in cases. For example, in one case we reviewed, a receiver appointed to 

find and liquidate assets received over $285,000 in fees and expenses-

-approximately half of the total amount collected. In another case, the 

fees paid to the receiver exceeded the amount returned to harmed 

investors. This receiver, who negotiated the sale of oil and gas 

interests, was paid approximately $11.6 million for his services; the 

investors received around $10 million. Furthermore, if managers had 

access to such a centralized system, they would not have to rely solely 

on the case attorneys for information--a factor that is particularly 

important given SECís relatively high turnover rate and resulting loss 

of experienced staff with knowledge of cases.



SEC Has Taken Steps to Ensure that Disgorgement Waivers Are 

Appropriate:



A report by SECís Inspector General found that SEC staff were not 

making sufficient efforts to verify the financial condition of 

violators seeking waivers of a disgorgement amount. In response, SEC 

issued new guidelines on the waiver process, and our review of a sample 

of recent waiver recommendations found that SEC staff were following 

these guidelines.



SECís Inspector General Identified Weaknesses in SECís Waiver Process:



According to SEC officials, waivers are a tool SEC can use to more 

easily reach settlements with violators and thus avoid spending 

resources on litigation. When violators request a waiver based on an 

inability to pay, SEC staff are to gather the necessary information to 

validate this claim and provide to the Commission, which must approve 

any such waivers, a recommendation to either approve or deny the 

request.[Footnote 20] The Commission usually approves waivers at the 

same time it approves the settlement of the enforcement action, prior 

to the courtís final approval of the disgorgement order. Waivers also 

must be approved by the court, and in recommending that courts grant 

waiver requests, SEC must be able to show that it cannot collect the 

total amount of the court-ordered disgorgement. SEC guidelines also 

require that waiver recommendations be supported with sworn financial 

statements and stipulate that depositions and information from third 

parties can be used for further support. SEC staff must analyze the 

financial statements to determine whether the information is accurate 

and complete. SEC generally does not consider waivers when the violator 

is a recidivist, when SEC believes the violator has withheld 

information, or when SEC has spent significant resources obtaining a 

judgment.



A June 2000 audit by SECís Inspector General staff found that SEC could 

improve its process for verifying the accuracy of the violatorís 

claimed lack of ability to pay the entire disgorgement order before 

recommending that waivers be approved by the Commission. Specifically, 

the audit identified two problems. First, staff did not verify that the 

information violators submitted was complete and accurate. Second, the 

procedures staff used to ensure that they had identified all of the 

violatorsí assets were inadequate. For example, SEC staff did not 

sufficiently utilize online databases to verify the information 

contained in financial statements or to identify hidden assets. As a 

result, SEC staff could not offer sufficient assurance that violators 

had disclosed all of their assets to SEC. To improve SECís ability to 

provide such assurance, the Inspector General identified best practices 

that enforcement staff could use in verifying violatorsí financial 

information and recommended that SEC adopt these procedures.



SEC Has Implemented Revised Guidelines, and Staff Are Following Them:



In October 2000, SEC implemented guidelines designed to improve the 

waiver recommendation process. The guidelines require SEC staff to 

analyze violatorsí financial statements by reviewing supporting 

documentation such as bank statements, tax returns, credit reports, and 

loan statements. In addition, SEC has contracted with a database 

provider that performs searches for information such as real property 

and motor vehicle records. SEC officials told us that under the 

guidelines, supervisors now review waiver recommendations made by their 

staff and that the Chief Counselís Office also reviews every waiver 

recommendation before it is submitted to the commissioners. The 

officials also told us that, when funds become available, they plan to 

hire an outside contractor to audit a sample of waiver recommendations 

in order to ensure that the guidelines are being followed and that the 

problems identified by SECís Inspector General have been addressed.



We reviewed a sample of 10 recent waiver recommendations and found that 

SEC staff were following the revised guidelines. For example, the 

guidelines describe certain types of situations in which SEC staff 

should investigate further or request additional information, and we 

found that SEC staff were taking these actions. In one case we 

reviewed, the violator owned stock in a company, and enforcement staff 

on the case requested information on this stock in order to determine 

its value. In another case, the violator did not initially submit 

complete information on his financial condition. Enforcement staff 

questioned him about his sources of income, obtained all relevant loan 

statements, and verified the value of his personal property, real 

estate, and business interests. Enforcement staff also were using 

database searches to obtain information on violatorsí assets and 

financial condition, as the guidelines require. However, not enough 

time has elapsed since the revised guidelines were put in place to 

determine their effect on the number or size of waivers recommended by 

SEC.



Conclusions:



Depriving securities law violators of their illegally obtained funds 

can help SEC achieve its mission of protecting investors and 

maintaining confidence in the fairness and integrity of the U.S. 

securities markets. Although we acknowledge that the collection rate is 

not likely the best measure for assessing the effectiveness of SECís 

disgorgement collection activities, improving the process for entering 

and updating the information in DPTS would provide accurate and current 

information for SEC to use to monitor progress on individual cases. 

Having such information would also allow SECís management to analyze 

potential trends in the aggregate data to ensure that any changes in 

the collection rate can be explained.



Although SEC officials considered disgorgement to be an important tool 

for sanctioning securities law violators and deterring additional 

fraud, we identified weaknesses in various elements of SECís 

disgorgement collection program. Under GPRA, federal agencies are 

expected to become more performance oriented by setting goals for 

program performance and measuring progress toward those goals. However, 

we found that the strategic and annual performance plans that SEC has 

prepared under GPRA did not specifically address disgorgement 

collection or establish performance measures to assess the 

effectiveness of the agencyís disgorgement collection efforts. Because 

SECís Division of Enforcement staff already juggle competing priorities 

and an expanding workload, the lack of strategic guidance and measures 

against which to assess performance could result in less collection 

activity being undertaken than SEC management desires. To reconcile the 

competing demands on its staff, SEC will have to weigh the importance 

of other enforcement activities relative to disgorgement collection 

against the concern that disgorgement may lose its effectiveness as a 

sanction and deterrent to further fraud if collection activities are 

not attempted. The agency has begun this process as part of considering 

various alternative means of collecting disgorgement amounts but has 

yet to complete its assessment and take action to implement any 

resulting program changes.



Similarly, SEC did not have in place specific policies and procedures 

that would provide staff with guidance on the type, timing, and 

frequency of collection actions they should consider and help them 

understand what is expected of them. SEC provided us with draft 

collection guidelines to be implemented by the end of July 2002 that 

would address these concerns, but has not yet finalized controls to 

help management ensure that staff follow the guidelines. Without such 

guidance and controls, SEC management cannot ensure that sufficient and 

appropriate collection efforts are being made consistently across all 

cases. Given SECís relatively high staff turnover rate, a tool to 

quickly determine what actions have been taken and when could help any 

staff that assume responsibility for cases with which they lack 

familiarity. Finally, SEC management did not have reliable, accessible 

information it could use to ensure that collection activity is taking 

place and that collected funds are being distributed promptly. With an 

accurate and current disgorgement tracking system, SEC managers could 

identify cases that may require attention, such as cases that have had 

considerable time pass without any collection activity. Furthermore, 

without an ability to centrally monitor subsequent distribution 

activities, SEC cannot assess the extent to which it is returning 

disgorgement funds to harmed investors.



Since our last report, SEC has improved its process for selecting 

individuals to recommend as receivers, and in the cases we reviewed 

staff have been taking actions to oversee receiversí efforts. However, 

SEC still does not track individual case information on receiversí fees 

and expenses in a central management information system, as we 

recommended in our 1994 report. Without such a system, SEC managers 

cannot readily identify cases in which receiver fees have risen to a 

significant portion of the amount collected and thus could miss the 

opportunity to take additional actions to ensure that such charges are 

appropriate and that the maximum amount is returned to harmed 

investors.



SEC has also taken steps to improve its ability to ensure that 

disgorgement waivers are recommended only when SEC has verified the 

violatorís inability to pay. Specifically, the agency implemented 

guidelines designed to provide better assurance that the financial 

information violators provide is accurate and that all assets have been 

identified. Based on our review of a sample of recent waiver 

recommendations, we found that SEC staff were following these 

guidelines. However, it was too early to determine what effect, if any, 

these guidelines were having on the number or amount of waivers 

granted.



Recommendations:



To improve SECís ability to ensure that the disgorgement collection 

program meets its goal of effectively deterring securities law 

violations and returning funds to harmed investors, we recommend the 

Chairman, SEC, take the following actions:



* Develop appropriate procedures to ensure that information maintained 

in DPTS is accurate and current.



* Ensure that disgorgement and the collection of disgorgement are 

addressed in SECís strategic and annual performance plans, including 

the development of appropriate performance measures.



* Expeditiously complete the evaluation of options for addressing the 

competing priorities and increasing workload faced by SECís 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.



* Ensure the prompt implementation 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.



* 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 Comments and Our Evaluation:



SEC officials provided written comments on a draft of this report that 

are reprinted in appendix II. In general, SEC agreed with most of the 

reportís findings, conclusions, and recommendations. As detailed in the 

written comments, SEC is taking or planning to take action to implement 

most of our recommendations. SEC officials also provided technical 

comments, which we have incorporated as appropriate.



In response to our recommendation to monitor the distribution of 

disgorgement, including fees paid to receivers, SEC officials said that 

the agency plans on implementing a system to monitor when courts enter 

distribution plans and when receivers distribute funds. However, as 

stated in its letter, SEC does not believe that aggregating information 

on distributions of disgorgement and receiver fees would help the 

agency assess how well it is meeting its goal of deterring fraud and 

depriving wrongdoers of their ill-gotten gains. SEC noted that the 

amount distributed to investors is a function of numerous factors that 

vary from case to case, including the size of the disgorgement award, 

how much the agency could collect, and the costs of administering the 

receivership. We agree that aggregate statistics on the amount of 

disgorgement distributed to investors and the fees paid to receivers 

may have limitations as measures of SECís performance in these areas. 

However, in addition to depriving violators of their illegally obtained 

funds, returning money to harmed investors is an important element of 

the disgorgement program. Knowing the total amount of funds returned to 

investors every year would provide SEC with an important means of 

documenting the impact of its efforts in this area. Reviewing such 

information over time would also help SEC focus on ensuring that harmed 

investors receive the maximum, reasonable amount of funds.



Another focus of our recommendation was to ensure that SEC management 

had an effective means for monitoring the fees paid to receivers in 

order to determine whether they are reasonable. While we recognize that 

receivership fees are within the purview of the court, SEC does have 

opportunity to object to those fees if they appear unreasonable. In 

addition, while we also recognize that the facts and circumstances of 

each individual case must be considered when making such 

determinations, a system that allows management to monitor cases across 

the Division of Enforcement can be a useful tool for identifying cases 

for further review. We believe that the system SEC plans to implement 

for monitoring the distribution of disgorgement can also be used for 

this purpose and would likely require only minimal additional 

resources.



As agreed with your offices, unless you publicly announce the contents 

of this report earlier, we plan no further distribution until 30 days 

from the report date. At that time, we will send copies of this report 

to the Chairman and Ranking Minority Members of the Senate Committee on 

Banking, Housing, and Urban Affairs and its Subcommittee on Securities 

and Investment; the Chairman, House Committee on Energy and Commerce; 

the Chairman of the House Committee on Financial Services and its 

Subcommittee on Capital Markets, Insurance, and Government Sponsored 

Enterprises; and other interested congressional committees. We also 

will send copies to the Chairman of SEC and will make copies available 

to others upon request. In addition, the report will be available at no 

charge on the GAO Web site at http://www.gao.gov.



If you or your staff have any questions regarding this report, please 

contact me or Cody J. Goebel at (202) 512-8678. Additional GAO contacts 

and acknowledgements are listed in appendix III.



Richard J. Hillman

Director, Financial Markets and

    Community Investment:



Signed by Richard J. Hillman:



[End of section]



Appendix I Scope and Methodology:



To determine SECís collection rate, we obtained and analyzed a copy of 

SECís database, as of November 16, 2001, containing all disgorgement 

orders ever entered into the database. Using this information, we 

calculated a single collection rate for all orders issued in fiscal 

years 1995 through 2001. We calculated a collection rate on 

disgorgement ordered for each fiscal year from 1989 to 1999. To ensure 

that the amount of time for collection was comparable in each of these 

years, we totaled the amount of disgorgement collected within a 2-year 

period following the date of each individual order.



We also assessed the reliability of the database by comparing data on 

the amounts and dates of the disgorgement orders, waived amounts, and 

payment amounts in the database to information in the case files for 57 

judgmentally selected disgorgement orders. These 57 cases included a 

judgmentally selected sample of 35 cases with full, partial, and no 

payments; 10 cases with waivers; and 2 cases used to pre-test our data 

collection instrument. We selected these cases based on a printout from 

DPTS to ensure that we reviewed cases with a variety of 

characteristics, such as whether collections had been successful and 

whether a receiver had been appointed. We confined our sample to civil 

cases with disgorgement ordered from fiscal years 1998 through 2000 

from the SEC Chicago, Los Angeles, and Washington, D.C., offices, and 

we visited these offices to review the files maintained there and to 

discuss the cases with attorneys who had worked on them, whenever 

possible. Finally, we also reviewed the 10 case files with the largest 

disgorgement amounts ordered from fiscal years 1995 until 2000 because 

these represented about 24 percent of the total dollar amount of 

disgorgement ordered during that period. We compared data on the 

amounts and dates of the disgorgement orders, waived amounts, and 

payment amounts. We also interviewed SEC officials knowledgeable about 

DPTS regarding the purpose of the system, security, data quality 

controls, and the data entry process. We were unable to determine the 

extent of the errors in the database because our sample was not 

representative of all SEC cases.



To determine factors that affect SECís ability to collect disgorgement, 

we spoke with officials from SEC, two private collection agencies, and 

three receivers that had worked on SEC disgorgement cases. In addition, 

we spoke with officials from other organizations and federal agencies 

that also conduct collections to learn how the characteristics of SECís 

disgorgement debts may have varied from other types of debts. These 

organizations and agencies included the Commodity Futures Trading 

Commission, the Department of Education, the Securities Investor 

Protection Corporation, and the National Association of Securities 

Dealers Regulation, Inc. We also used the case files we selected to 

identify any characteristics that appeared to affect collections and to 

corroborate the factors described by the officials with whom we spoke.



To assess SECís disgorgement collection program, we reviewed SECís 

strategic and annual plans, its administrative rules of practice 

regarding disgorgement payments, rules relating to debt collection, and 

guidelines on distribution. We also discussed the collection and 

distribution processes with SEC officials from Washington D.C., the 

Chicago Midwest Regional Office, and the Los Angeles Pacific Regional 

Office. We also reviewed the judgmentally selected case files to 

examine collection actions taken after the disgorgement order date. In 

cases in which collections had occurred, we also used the files to 

determine what distribution activities had taken place. In instances in 

which we could not determine what collection actions had been taken or 

the reasons disgorgement went uncollected, we spoke with SEC attorneys 

familiar with these cases to learn what collection efforts had been 

made and what had contributed to any inability to collect the owed 

amounts. The results of our case file review are not representative of 

all SEC cases. We also spoke to officials at the National Association 

of Securities Dealers Regulation, Inc. about their experience with 

contracting out collection activities.



To evaluate the changes in SECís process for recommending receivers and 

monitoring their activities, we reviewed documentation on SECís 

policies and procedures for selecting receivers. In addition, we 

discussed the selection and monitoring activities with officials from 

the Division of Enforcement, SECís Office of the General Counsel, and 

the Chicago and Los Angeles regional offices. We also spoke with three 

receivers appointed to SEC disgorgement cases to obtain their views on 

their role, responsibilities, and relationship with SEC officials. 

Finally, we reviewed a printout from the agencyís receiver database and 

examined 10 recent cases in which a receiver was recommended to assess 

SECís compliance with its selection procedures. We also reviewed seven 

cases in which a receiver had been appointed to determine how SEC 

monitors receiver activities. We also spoke with SEC attorneys to learn 

what actions had been taken to monitor receivers and to review receiver 

fee applications. The results of our case file review are not 

representative of all SEC disgorgement cases.



To evaluate the improvements in SECís process for recommending the 

waiving of disgorgement amounts, we reviewed the SEC Inspector 

Generalís January 2001 report and applicable guidelines related to 

recommending waivers. We discussed the waiver process with officials 

from SECís Division of Enforcement and the SEC Inspector Generalís 

Office. In addition, we conducted a case file review of 10 cases with 

partial and full waivers and a final judgment ordered in fiscal year 

2001. We judgmentally selected between two to four disgorgement cases 

from the SEC Chicago, Los Angeles, and Washington, D.C., offices. The 

results of our case file review are not representative of all SEC 

cases. In addition, our office of investigation conducted an asset 

search on one waiver case to confirm that the defendant had no means to 

pay and that the waiver was justified.



We conducted our work at the SEC Washington, D.C., headquarters, 

Chicago Midwest Regional Office, and Los Angeles Pacific Regional 

Office from August 2001 through July 2002 in accordance with generally 

accepted government auditing standards.



[End of section]



Appendix II Comments from the Securities and Exchange Commission:



DIVISION OF ENFORCEMENT:



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 

20549:



July 3, 2002:



Mr. Richard J. Hillman Director:



Financial Markets and Community Investment U.S. General Accounting 

Office:



441 G Street, N.W. Washington D.C. 20548:



Re: Draft Report Entitled ďMore Actions Needed to Improve Oversight of 

Disgorgement CasesĒ:



Dear Mr. Hillman:



Thank you for providing us with the opportunity to review and comment 

on your draft report addressing the Securities and Exchange 

Commissionís collection efforts regarding disgorgement. The report 

discusses the usefulness of collection rates as a measure of the 

effectiveness of our disgorgement efforts, assesses our collections 

program, evaluates the changes in the SECís process for recommending 

receivers and evaluates our process for recommending waivers of 

disgorgement amounts.



As the report points out, we have obtained a number of large judgments 

for disgorgement knowing that it was unlikely they would ever be paid. 

We believe that it is important to continue to obtain these judgments, 

and have them hang over defendantsí heads, both for their general and 

specific deterrent effect and because of the limits they place on these 

defendants in terms of their ability to raise further capital or to use 

entities as vehicles for fraud in the future. As a result, however, 

since many large judgments are uncollectable from the time they are 

entered and for the other reasons you articulate in your report, the 

collection rate is not an appropriate measure of our effectiveness as 

to disgorgement.



We agree with most of your conclusions and recommendations and are 

already implementing some of the most important recommendations. In 

sum, we will: *	distribute clearer guidance for our staff on more timely 

and effective collection efforts,



* develop a new procedure for obtaining updated information on 

disgorgement amounts ordered and collected,



* seek to develop a performance measure related to disgorgement and 

collections,



* examine contracting with outside firms to do collection work, and:



* implement a system to monitor when courts enter distribution plans 
and 

when funds are distributed under those plans.



Our specific comments as to several of the recommendations follow.



I. Ensuring Reliability of Disgorgement Data:



The draft report found inaccuracies in the sample of data examined 

which are largely the results of delays in obtaining updated 

information concerning actions in Federal Court or payments to a court 

registry or court appointed receiver. The draft report recommends that 

the SEC develop procedures to ensure that information in the 

Disgorgement Penalty Tracking System be current and accurate. We agree 

with this recommendation and accordingly, we are developing a new 

procedure for obtaining updated information more rapidly. As an 

alternative to our existing practice of generating periodic reports for 

review and update by staff, we have determined to require that the 

responsible staff must submit to DPTS a Financial Judgment Record Form 

as soon as they receive notice of any reportable event that pertains to 

disgorgement. The Form will be made available to all staff 

electronically and staff will be instructed to submit completed forms 

via a dedicated e-mail mailbox.



11. Ensuring Disgorgement and Collections are Addressed in Strategic 
and 

Performance Plans:



The draft report recommends that disgorgement and collections be 

addressed in the SECís strategic and annual performance plans. We view 

judgments for disgorgement and collection of those judgments as 

important components of our mission of investor protection. We will 

seek to develop a performance measure related to disgorgement and 

collections for inclusion in the fiscal 2004 performance plan and the 

strategic plan when it is next updated. We do not believe that the new 

performance measure should be the rate at which disgorgement is 

collected, however. As you point out, the collection rate can be skewed 

by whether we have a large payment from one defendant in a given year 

and because the individuals who owe large sums of disgorgement 

generally have long since spent their ill-gotten proceeds and there is 

simply no hope that money will be obtained. We will develop a measure 

based on the timeliness of our collection efforts.



111. Addressing Competing Priorities within the Division of 
Enforcement:



The draft report recommends that we expeditiously complete our current 

efforts to assess the feasibility of (i) contracting for certain 

collection functions, and (ii) increasing the number of staff devoted 

to collection efforts. The report accurately describes the enormous 

workload and:



the competing priorities of the staff, including whether to do 

collection work or to work on stopping new and ongoing frauds. While 

collections have always been viewed as extremely important, our first 

priority has been, and we believe should continue to be, to stop 

ongoing frauds with the aim of protecting investors from additional 

losses. We have been examining contracting with outside firms to do 

collection work and will make every effort towards issuing a request 

for proposals expeditiously.



As to devoting more staff exclusively to collections:	we do not 

currently have the staff to accomplish this goal. There are, however, 

proposals to increase our staffing levels and we will reexamine our 

ability to devote more staff exclusively to this effort as our staffing 

levels increase.



VI. Finalizing Collection Guidelines:



The draft report recommends that we establish a specific time frame for 

developing and implementing collection guidelines. The Division of 

Enforcement has developed collection guidelines and will implement the 

guidelines during July 2002. These guidelines address all aspects of 

your recommendations; they include practice guides to assist the staff 

in enforcing judgments through litigation, requiring the staff to 

adhere to certain deadlines and tracking the staffís efforts and 

results.



V. Monitoring Distributions of Disgorgement:



Last, your draft report recommends that we:



[e]nsure 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.



As noted in the draft report, the SEC staff currently monitors the 

distribution of disgorgement, typically by court appointed receivers, 

on a case-by-case basis. We plan on implementing a system to monitor 

when courts enter distribution plans and when receivers (or other 

distribution agents) distribute funds.



We do not believe that aggregating information on distributions of 

disgorgement would help the agency assess how well it is meeting its 

goal of deterring fraud and depriving wrongdoers of their ill-gotten 

gains. The amount distributed to investors (rather than given to the 

United States Treasury) is a function of numerous factors that vary 

from case to case, including the size of the disgorgement award, how 

much the agency (and the receiver, if one is appointed) could collect, 

and the costs of administering the receivership, including fees paid to 

receivers and attorneys and accountants under their direction. In some 

complex cases, receiver fees and costs will necessarily consume a 

substantial portion of the disgorged assets. In some simple cases, the 

fees and costs necessary to distribute the disgorged funds will be 

minimal. Combining the amounts distributed and the fees paid to 

receivers in many cases will not shed any light on whether defrauded 

investors could or should have received more in any particular case or 

even overall. The only way to determine if the amount returned to 

investors is appropriate is to evaluate the particular facts and 

circumstances of the case. Since the receivership fees are totally 

within the purview of the court in any particular matter, we do not 

believe that accumulating data:



on these fees would be useful in accomplishing our mission of investor 

protection. We are issuing new guidelines for collections and 

establishing new systems for tracking collections and distributions. We 

believe that those measures will greatly improve our ability to monitor 

the effectiveness of our disgorgement program. In addition, we note 

that these efforts will be an enormous undertaking with limited staff 

resources. While we will continually review the effectiveness of these 

measures, and consider modifications as appropriate, we do not believe 

that accumulating additional data is realistic or useful at this time.



We appreciate the care and thought that is evident throughout your 

report and recommendations. If we can be of any further assistance 

please contact me at (202) 942-4500 or Joan McKown at 942-4530.



Yours truly,



Stephen M. Cutler Director:



[End of section]



Appendix III GAO Contacts and Staff Acknowledgments:



GAO Contacts:



Richard J. Hillman (202) 512-8678

Cody J. Goebel (202) 512-7329:



Acknowledgments:



In addition to those individuals named above, Patrick Ward, Michele 

Tong, Anita Zagraniczny, Carl Ramirez, Jerry Sandau, Sindy Udell, and 

Emily Chalmers made key contributions to this report.



[End of section]



FOOTNOTES



[1] U.S. General Accounting Office, Securities Enforcement: 

Improvements Needed in SEC Controls Over Disgorgement Cases, GAO/GGD-

94-188 (Washington, D.C.: Aug. 23, 1994).



[2] Kevin McCoy, ďConned Investors May Never See Refunds: SEC 

Collection Rate Falls Sharply Since 1994,Ē USA Today, Jan. 9, 2001, 

final edition.



[3] Securities and Exchange Commission, Office of the Inspector 

General: Disgorgements, Audit No. 311 (Washington, D.C.: Jan. 11, 

2001).



[4] Unless otherwise noted, years presented are fiscal years ending 

September 30.



[5] The process of imposing and enforcing court-ordered disgorgement is 

detailed in appendix II of GAO/GGD-94-188.



[6] U.S. General Accounting Office, SEC Operations: Increased Workload 

Creates Challenges, GAO-02-302 (Washington, D.C.: Mar. 5, 2002) and 

Securities and Exchange Commission: Human Capital Challenges Require 

Management Attention, GAO-01-947 (Washington, D.C.: Sept. 17, 2001).



[7] GAO issues standards for internal control in the federal government 

as required by 31 U.S.C. 3512. These standards provide the overall 

framework for establishing and maintaining internal controls and for 

identifying and addressing major performance challenges. See U.S. 

General Accounting Office, Standards for Internal Control in the 

Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 

1999).



[8] Courts sometimes make more than one violator jointly and severally 

liable for the entire amount in the disgorgement order. In such cases, 

payments by one or more violators reduce the total amount owed by all 

violators, and if one violator pays the entire amount, the order would 

be considered satisfied for all violators.



[9] The timeliness of the data contained in DPTS has been an issue 

since at least 1991 when SECís Inspector General noted similar problems 

and recommended that procedures be developed to ensure that the data 

are current.



[10] In a recent report, we noted that the Department of Justice faces 

a similar situation in collecting criminal restitution, which is 

assessed without consideration of the criminalís ability to pay. See 

U.S. General Accounting Office, Criminal Debt: Oversight and Actions 

Needed to Address Deficiencies in Collection Processes, GAO-01-664 

(Washington, D.C.: July 16, 2001).



[11] U.S. General Accounting Office, SEC and CFTC: Most Fines 

Collected, but Improvements Needed in the Use of Treasuryís Collection 

Service, GAO-01-900 (Washington, D.C.: July 16, 2001).



[12] In bankruptcy proceedings, disgorgement is treated as unsecured 

debt, which is paid after any secured debts are satisfied.



[13] U.S. General Accounting Office, Managing for Results: The 

Statutory Framework for Performance-Based Management and 

Accountability, GAO/GGD/AIMD-98-52 (Washington, D.C.: Jan. 28, 1998).



[14] See Office of Management and Budget, Circular No. A-11, Part 2: 

Overview of Strategic Plans, Annual Performance Plans, and Annual 

Program Performance Reports (Washington, D.C.: Nov. 18, 2001) and U.S. 

General Accounting Office, Agency Performance Plans: Examples of 

Practices That Can Improve Usefulness to Decisionmakers, GAO/GGD/AIMD-

99-69 (Washington, D.C.: Feb. 26, 1999).



[15] GAO/GGD/AIMD-98-52.



[16] The National Association of Securities Dealers Regulation, Inc. 

did not yet have enough experience with the contracting effort to 

evaluate its success.



[17] The SEC Chairman announced this initiative in a November 8, 2001 

speech at the Practicing Law Instituteís 33RD Annual Institute on 

Securities Regulation.



[18] See GAO/AIMD-00-21.3.1.



[19] A fiduciary must act with the same degree of care and skill that a 

reasonably prudent person would use in connection with his or her own 

affairs.



[20] SEC has five commissioners, who are appointed by the President to 

5-year terms. Among their other responsibilities, the commissioners 

approve actions that SEC staff seek to bring against violators.



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