a

GAO

United States General Accounting Office

Report to Congressional Requesters

July 2002 SEC ENFORCEMENT

More Actions Needed 

to Improve Oversight 

of Disgorgement 

Collections

GAO-02-771
Page i GAO-02-771 SEC Enforcement

Contents

Letter 1

Results in Brief 3

Background 5

SEC’s Reported Collection Rate Is Not an Effective Measure of SEC’s 

Collection Efforts 7

SEC Lacks Strategic Guidance, Clear Policies and Procedures, and 

an Effective Monitoring Mechanism for the Disgorgement 

Collection Process 15

SEC Has Improved Its Process for Selecting and Monitoring 

Receivers but Does Not Have a Central Monitoring System 21

SEC Has Taken Steps to Ensure that Disgorgement Waivers Are 

Appropriate 25

Conclusions 27

Recommendations 28

Agency Comments and Our Evaluation 29

Appendixes

Appendix I: Scope and Methodology 32

Appendix II: Comments from the Securities and Exchange Commission 35

Appendix III: GAO Contacts and Staff Acknowledgments 39

GAO Contacts 39

Acknowledgments 39

Figures Figure 1: Percent of Disgorgement Reported as Waived and 

Collected by SEC, 1995-2001 8

Figure 2: Percent of Disgorgement SEC Reported Collecting in the 

2 Years After the Orders Were Issued 9

Abbreviations

DPTS Disgorgement Payment Tracking System 

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

SEC Securities and Exchange Commission
Page 1 GAO-02-771 SEC Enforcement

United States General Accounting Office

Washington, D.C. 20548

A

July 12, 2002 Letr

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 

SEC’s 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 SEC’s success in collecting these funds. 

We reported on SEC’s 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.1

 That report 

also included recommendations relating to SEC’s oversight of the receivers 

appointed by courts to collect and distribute disgorged funds. A January 

2001 press article reported that SEC’s disgorgement collection rate had

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).
Page 2 GAO-02-771 SEC Enforcement

declined significantly since our 1994 report, raising questions about the 

ongoing effectiveness of SEC’s collection program.2

 Finally, a recent report 

by SEC’s Inspector General3

 raised concerns about the process SEC uses to 

waive some or all of a disgorgement amount based on the violator’s 

financial condition. At your request, this report focuses on SEC’s current 

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

of the collection rate as a measure of the effectiveness of SEC’s collection 

efforts, (2) assess SEC’s program for collecting disgorgement, (3) evaluate 

the changes in SEC’s process for recommending receivers and monitoring 

their activities, and (4) evaluate the improvements in SEC’s process for 

recommending waivers of disgorgement amounts.

To determine the usefulness of the collection rate as a measure of SEC’s 

collection efforts, we analyzed information in SEC’s disgorgement database 

to calculate a single collection rate for 1995 to 20014

 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 SEC’s ability to collect 

disgorgement and the resulting collection rate. To assess SEC’s 

disgorgement collection program, we reviewed SEC’s 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 SEC’s process for recommending receivers, we reviewed 

related policies and procedures and examined 10 recent receiver 

recommendations to verify compliance with these procedures. To review 

2

Kevin McCoy, “Conned Investors May Never See Refunds: SEC Collection Rate Falls 

Sharply Since 1994,” 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.
Page 3 GAO-02-771 SEC Enforcement

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, SEC’s disgorgement collection rate is not adequate as 

a measure of the effectiveness of SEC’s disgorgement program. First, while 

SEC data showed a collection rate of 14 percent for the $3.1 billion in 

disgorgement ordered in 1995–2001—compared with the 50 percent 

collection rate 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 SEC’s 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 SEC’s actual disgorgement collection rate. Third, factors beyond 

SEC’s control, including violators’ inability to pay, reduce the likelihood 

that SEC will be able to collect the full amount of disgorgement ordered. 

To deprive securities law violators of illegally obtained funds, SEC needs 

an effective collection program with clearly defined objectives and 

measurable goals, specific policies and procedures for its staff, and 

systems to allow management to monitor performance. However, SEC’s 

strategic and annual performance plans do not address disgorgement 

collection or clarify its priority relative to other activities. SEC also has not 

developed performance measures and, therefore, lacks the information 

necessary to evaluate the program’s 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 
Page 4 GAO-02-771 SEC Enforcement

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 receivers’ actions, but 

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

perform a variety of tasks, such as gathering and liquidating a violator’s 

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 receivers’ activities 

and gathering enough information to assess receivers’ fee applications. 

However, SEC does not have a system for tracking individual case data on 

receivers’ fees, as we recommended in our 1994 report. Some receiver’s 

duties can be complex, and consequently their fees can sometimes exceed 

half the funds collected. Tracking this information could improve 

management’s ability to identify cases in which receiver’s 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 SEC’s 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 violators’ 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 
Page 5 GAO-02-771 SEC Enforcement

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 

SEC’s 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 SEC’s strategic and 

annual plans, (3) addressing the competing priorities within SEC’s 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 SEC’s Division of Enforcement. SEC agreed 

with most of the report’s conclusions and recommendations and stated that 

the agency is already implementing some of the most important 

recommendations. SEC’s 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, SEC’s 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. 
Page 6 GAO-02-771 SEC Enforcement

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 violator’s 

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 violator’s assets 

and overseeing the distribution of funds to harmed investors. Receivers are 

paid out of the funds collected to pay the disgorgement order.5

 After SEC 

exhausts all practical collection actions, the agency is required to transfer 

its uncollected debt to the Treasury Department’s Financial Management 

Service for final collection efforts.

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

fulfilling its mission.6

 U.S. securities markets have grown tremendously and 

become more complex and international, increasing the volume and 

complexity of SEC’s workload. SEC’s 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. SEC’s Division of Enforcement has, likewise, had 

substantial turnover, with 89 professional staff leaving the division during 

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).
Page 7 GAO-02-771 SEC Enforcement

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

2001.

SEC’s Reported 

Collection Rate Is Not 

an Effective Measure 

of SEC’s Collection 

Efforts

SEC’s current collection rate is limited as a measure of the effectiveness of 

SEC’s collection program for several reasons. First, although its collection 

rate appeared to decline from prior periods, we found that SEC’s 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 SEC’s disgorgement collections, 

have created errors that prevented us from determining the actual 

disgorgement collection rate. Finally, the collection rate is less useful to 

measure SEC’s program because factors beyond SEC’s 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). 
Page 8 GAO-02-771 SEC Enforcement

Figure 1: Percent of Disgorgement Reported as Waived and Collected by SEC, 1995-

2001 

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

Source: GAO analysis of SEC data.

However, our analysis also found that SEC’s 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). 
Page 9 GAO-02-771 SEC Enforcement

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

Orders Were Issued

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.

An analysis of these collection rates shows that SEC’s 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, SEC’s 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. 
Page 10 GAO-02-771 SEC Enforcement

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 SEC’s collection rate, using this rate as a measure of changes 

in the overall effectiveness of SEC’s 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 SEC’s reported collection rate 

as a measure of SEC’s collection efforts is that the data used to calculate 

that rate are unreliable. According to standards issued by GAO,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 SEC’s 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.

SEC’s 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 

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).
Page 11 GAO-02-771 SEC Enforcement

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.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 

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.
Page 12 GAO-02-771 SEC Enforcement

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 SEC’s process for updating the information in DPTS 

may result in the information not being current. SEC’s 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.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 SEC’s 

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 SEC’s disgorgement collection efforts is that factors 

beyond SEC’s 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

9

The timeliness of the data contained in DPTS has been an issue since at least 1991 when 

SEC’s Inspector General noted similar problems and recommended that procedures be 

developed to ensure that the data are current.
Page 13 GAO-02-771 SEC Enforcement

violators’ ability to pay.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 violator’s 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 violator’s 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 violator’s lack of 

ability to pay. According to SEC officials, the fact that fines are assessed 

this way is one reason why SEC’s 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.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 

10In 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 criminal’s 

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).

11U.S. General Accounting Office, SEC and CFTC: Most Fines Collected, but Improvements 

Needed in the Use of Treasury’s Collection Service, GAO-01-900 (Washington, D.C.: July 16, 

2001).
Page 14 GAO-02-771 SEC Enforcement

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 case’s 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 violator’s 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 violator’s 

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.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.

12In bankruptcy proceedings, disgorgement is treated as unsecured debt, which is paid after 

any secured debts are satisfied.
Page 15 GAO-02-771 SEC Enforcement

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 

SEC’s disgorgement collection program. First, SEC lacks clearly defined 

strategic objectives and measurable goals for its collection program. SEC’s 

strategic and annual performance plans, prepared under the Government 

Performance and Results Act (GPRA),13 do not address the importance of 

disgorgement collections or provide measures that would help SEC 

management monitor its staff’s 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

13U.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).
Page 16 GAO-02-771 SEC Enforcement

strategic plan that articulates the agency’s mission and includes long-term 

goals. 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 agency’s programs are achieving desired 

results.

According to SEC’s 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, SEC’s strategic and annual plans do not clarify the 

priority disgorgement collection should have in relation to SEC’s 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.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.

SEC’s 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 SEC’s 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 SEC’s 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 SEC’s civil suits, negotiate settlements, and conduct collection 

activities for fines SEC levies.

14See 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).

15GAO/GGD/AIMD-98-52.
Page 17 GAO-02-771 SEC Enforcement

SEC staff told us that the agency’s 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 SEC’s 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 

SEC’s 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.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 

16The National Association of Securities Dealers Regulation, Inc. did not yet have enough 

experience with the contracting effort to evaluate its success.
Page 18 GAO-02-771 SEC Enforcement

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 SEC’s Chairman and commissioners may also affect 

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

initiative called real-time enforcement,17 which is intended to provide 

quicker and more effective protection for investors and better oversight for 

the markets with SEC’s 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 

SEC's 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. 

SEC’s Lack of Clear 

Collection Policies and 

Procedures Hinders 

Management Oversight of 

Staff Collection Activities

SEC’s 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,18 policies 

and procedures should be designed to help ensure that management’s 

directives are carried out. During the period covered by our review, SEC 

did not have in place such policies and procedures for disgorgement 

17The SEC Chairman announced this initiative in a November 8, 2001 speech at the 

Practicing Law Institute’s 33rd Annual Institute on Securities Regulation.

18See GAO/AIMD-00-21.3.1.
Page 19 GAO-02-771 SEC Enforcement

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 violator’s property, or seek to have a violator’s 

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 SEC’s 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 Department’s 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. 
Page 20 GAO-02-771 SEC Enforcement

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. SEC’s 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 

violator’s 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 
Page 21 GAO-02-771 SEC Enforcement

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

through criminal restitution was transferred to SEC’s 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 SEC’s 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 management’s 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 SEC’s cases to perform tasks such as gathering and 

liquidating violators’ 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 SEC’s 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 
Page 22 GAO-02-771 SEC Enforcement

impartially as possible.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 applicants’ 

experience, fees, and staffing and operational plans. The candidates’ 

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 candidates’ 

proposals. These criteria include costs and the candidate’s 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 candidates’ 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 

19A 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.
Page 23 GAO-02-771 SEC Enforcement

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 candidate’s 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 receivers’ actions. Staff in SEC’s 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 receiver’s 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 receivers’ fee applications, SEC attorneys 

review the applications beforehand and comment on the reasonableness of 
Page 24 GAO-02-771 SEC Enforcement

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 receiver’s 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 receiver’s 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 receiver’s duties, such as preparing a 

distribution plan, to minimize the receiver’s 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 receivers' 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 SEC's oversight of all cases. Managers 

would be able to identify specific instances in which receivers' 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 receivers’ 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 
Page 25 GAO-02-771 SEC Enforcement

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 SEC's 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 SEC’s 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.

SEC’s Inspector General 

Identified Weaknesses in 

SEC’s 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.20 The Commission 

usually approves waivers at the same time it approves the settlement of the 

enforcement action, prior to the court’s 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.

20SEC 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.
Page 26 GAO-02-771 SEC Enforcement

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

improve its process for verifying the accuracy of the violator’s 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 violators’ 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 SEC’s ability 

to provide such assurance, the Inspector General identified best practices 

that enforcement staff could use in verifying violators’ 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 violators’ 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 

Counsel’s 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 SEC’s 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 
Page 27 GAO-02-771 SEC Enforcement

using database searches to obtain information on violators’ 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 SEC’s 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 

SEC’s 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 SEC’s 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 agency’s 

disgorgement collection efforts. Because SEC’s 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 
Page 28 GAO-02-771 SEC Enforcement

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 SEC’s 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 receivers’ efforts. However, SEC still 

does not track individual case information on receivers’ 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 violator’s 

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 SEC’s ability to ensure that the disgorgement collection 

program meets its goal of effectively deterring securities law violations and 
Page 29 GAO-02-771 SEC Enforcement

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 SEC’s 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 SEC’s Division of 

Enforcement staff, including assessing the feasibility of contracting 

certain collection functions and increasing the number of staff devoted 

exclusively to collections, and take steps to implement any 

recommended actions. 

• 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 report’s 

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 
Page 30 GAO-02-771 SEC Enforcement

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 SEC’s 

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.
Page 31 GAO-02-771 SEC Enforcement

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
Page 32 GAO-02-771 SEC Enforcement

Appendix I

Scope and Methodology AAppenednxidexiIs

To determine SEC’s collection rate, we obtained and analyzed a copy of 

SEC’s 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 SEC’s 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 SEC’s 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, 
Appendix I

Scope and Methodology

Page 33 GAO-02-771 SEC Enforcement

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 SEC’s disgorgement collection program, we reviewed SEC’s 

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 SEC’s process for recommending receivers and 

monitoring their activities, we reviewed documentation on SEC’s policies 

and procedures for selecting receivers. In addition, we discussed the 

selection and monitoring activities with officials from the Division of 

Enforcement, SEC’s 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 agency’s receiver database and examined 10 recent cases 

in which a receiver was recommended to assess SEC’s 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 SEC’s process for recommending the 

waiving of disgorgement amounts, we reviewed the SEC Inspector 

General’s January 2001 report and applicable guidelines related to 
Appendix I

Scope and Methodology

Page 34 GAO-02-771 SEC Enforcement

recommending waivers. We discussed the waiver process with officials 

from SEC’s Division of Enforcement and the SEC Inspector General’s 

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.
Page 35 GAO-02-771 SEC Enforcement

Appendix II

Comments from the Securities and Exchange 

Commission ApendxiI
Appendix II

Comments from the Securities and Exchange 

Commission

Page 36 GAO-02-771 SEC Enforcement
Appendix II

Comments from the Securities and Exchange 

Commission

Page 37 GAO-02-771 SEC Enforcement
Appendix II

Comments from the Securities and Exchange 

Commission

Page 38 GAO-02-771 SEC Enforcement
Page 39 GAO-02-771 SEC Enforcement

Appendix III

GAO Contacts and Staff Acknowledgments ApendxiI

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.

(250046)
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