SEC Enforcement: More Actions Needed to Improve Oversight of Disgorgement Collections
Published: 2002-07-12T00:00:00

Fast Facts:

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

section_title: Letter
paragraphs: 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. 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 declined significantly since our 1994 report, raising questions about the  ongoing effectiveness of SEC’s collection program. Finally, a recent report  by SEC’s Inspector General 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 2001 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  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.
subsections: section_title: Background
paragraphs: 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.
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. 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. 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  2000 and 2001, which was about 16 percent of the 553 staff in the division in  2001.
section_title: SEC’s Reported Collection Rate Is Not an Effective Measure of SEC’s Collection Efforts
paragraphs: 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.
subsections: section_title: SEC Data Show That a Large Amount of Disgorgement Is Not Collected, but the Collection Rate Varied Widely
paragraphs: 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).
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).
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.
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.
section_title: Data Entry and Update Procedures Have Not Ensured Accurate or Current Information
paragraphs: 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,  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  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. 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 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.
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.
section_title: Factors Beyond SEC’s Control Make It Unlikely That SEC Will Collect All Disgorgement
paragraphs: 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 violators’ ability to pay. 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. 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 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.
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.
section_title: SEC Lacks Strategic Guidance, Clear Policies and Procedures, and an Effective Monitoring Mechanism for the Disgorgement Collection Process
paragraphs: 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), 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.
subsections: section_title: SEC Has Not Strategically Addressed Disgorgement Collection Priority In Light of Competing Priorities and Increased Workload
paragraphs: 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.
subsections: section_title: SEC Strategic Plans Do Not Address Disgorgement Priority or Provide Effectiveness Measures
paragraphs: 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 agency’s mission and includes long-term  goals. 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. 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.
section_title: SEC’s Competing Priorities and Increasing Workload Create the Risk That Staff Cannot Make Sufficient Collection Efforts
paragraphs: 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.
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.
section_title: SEC Is Considering Actions to Address the Competing Priorities Faced by Its Staff
paragraphs: 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. 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 SEC’s Chairman and commissioners may also affect  how staff balance their priorities. In November 2001, SEC announced an  initiative called real-time enforcement, 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   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.
section_title: SEC’s Lack of Clear Collection Policies and Procedures Hinders Management Oversight of Staff Collection Activities
paragraphs: 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, 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  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.
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.
section_title: SEC Management Does Not Have a System to Monitor Disgorgement Collections
paragraphs: 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  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.
section_title: SEC Has Improved Its Process for Selecting and Monitoring Receivers but Does Not Have a Central Monitoring System
paragraphs: 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.
subsections: section_title: SEC Has Improved Its Process for Selecting Individuals to Recommend As Receivers
paragraphs: 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  impartially as possible. 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  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.
section_title: SEC Does Not Directly Supervise Receivers but Does Monitor Their Activities
paragraphs: 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  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.
section_title: SEC Does Not Centrally Monitor Information on Receiver Fees
paragraphs: 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  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.
section_title: SEC Has Taken Steps to Ensure that Disgorgement Waivers Are Appropriate
paragraphs: 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.
subsections: section_title: SEC’s Inspector General Identified Weaknesses in SEC’s Waiver Process
paragraphs: 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. 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.
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.
section_title: SEC Has Implemented Revised Guidelines, and Staff Are Following Them
paragraphs: 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  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.
section_title: Conclusions
paragraphs: 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  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.
section_title: Recommendations
paragraphs: To improve SEC’s ability to ensure that the disgorgement collection  program meets its goal of effectively deterring securities law violations and  returning funds to harmed investors, 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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  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.
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.
section_title: Scope and Methodology
paragraphs: 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,  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  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.
section_title: Comments from the Securities and Exchange Commission
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: 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.
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