In most cases, the fraudster doesn't pay it all and the Commission moves to hold him in civil contempt for disobeying the Court's order. The fraudster claims to the Court that it is impossible for him to comply because the money is gone and he is "without the financial means to pay". The Commission then issues a "waiver" and that's the way many cases end. Thus both sides can put the case behind them. The fraudster agrees to the re-opening of the case if he turns out to have lied.
This procedure is problematic. The Commission typically alleges that these fraudsters have lied through their teeth in securities sales - but is forced to accept their word in an affidavit swearing that they have no money to pay the disgorgement. So the waivers are based on an assumption of credibility that has no basis in experience and possibly none in fact.
Moreover, the Division of Enforcement has no mechanism in place to check if the fraudster has, indeed, lied. After the waiver, the files of the case get stored. The case is closed. I don't know if there's even a central place where the records of waivers are kept.
In the six years I was at the Commission, I never heard of a case involving a breach of waiver affidavit. I doubt if one has ever been brought by the Commission - anywhere. UPI ought to do a Freedom Of Information Act Request on that.
Something similar happens with the Commission's much vaunted ability to levy civil penalties. The statute requires that a court trial be held to determine the egregiousness of the fraud. Based on its findings, the court can levy the fines. But, according to some earlier non- SEC case law, a fraudster can ask for a jury trial regarding the amount of the civil penalties because he or she lack the means to pay them. U.S. district courts being as busy as they are, there's no way the court is going to hold a jury trial.
Instead, the fraudster consents to a court order "noting the appropriateness of civil penalties for the case, but declining to set them based on a demonstrated inability to pay". Again, if the fraudster lied, the Commission can ask the Court to revisit the issue.
Q. Internet fraud, corporate malfeasance, derivatives, off- shore special purpose entities, multi-level marketing, scams, money laundering - is the SEC up to it? Isn't its staff overwhelmed and under-qualified? A. The staff is overwhelmed. The longest serving are often the least qualified because the talented usually leave.
We've already got the criminal statutes on the books for criminal prosecution of securities fraud at the federal level. Congress should pass a law deputizing staff attorneys of the Commission Division of Enforcement, with at least one-year experience and high performance ratings, as Special Assistant United States Attorneys for the prosecution of securities fraud. In other words, make them part of the Department of Justice to make criminal, not just civil cases, against the fraudsters.
The US Department of Justice does not have the person power to pursue enough criminal securities cases in the Internet Age. Commission attorneys have the expertise, but not the legal right, to bring criminal prosecution. The afore-described waiver system only makes the fraudsters more confident that the potential gain from fraud outweighs the risk.
I'd keep the civil remedies. In an ongoing fraud, with no time to make out a criminal case, the Commission staff can seek a Temporary Restraining Order and an asset freeze. This more closely resembles the original intent of Congress in the 1930s. But after the dust settles, the investing public deserves to demand criminal accountability for the fraud, not just waivers.