from Securities and Exchange Commission
The SEC's Office of Investor Education and Advocacy is issuing this Investor Bulletin to educate investors about how they may be able to recover money if they have been harmed by a violation of the federal securities laws. Every year, thousands of U.S. investors lose money to fraudulent investment schemes. In some cases, investors harmed by securities fraud or other securities law violations may be eligible to receive money recovered by the SEC. A number of different processes exist to help harmed investors, including: fair funds and disgorgement funds; receiverships; brokerage account customer protections; corporate bankruptcy proceedings; and private class action lawsuits.
It is important to understand, however, that not all harmed investors will be able to recover money, and many of those who recover money receive less, often substantially less, than their losses from the securities fraud. In addition, even when harmed investors are able to recover money, the process for distributing the money to harmed investors may take a long time.
Fair Funds and Disgorgement Funds
When the SEC brings a successful enforcement action, in court or in an administrative proceeding, the court or the SEC may order the individual or entity to disgorge the funds (give up the ill-gotten gains) resulting from the illegal conduct. The disgorged funds may be distributed to investors who were harmed or injured by the securities violation.
In addition, whether or not disgorgement is ordered, a court or the SEC may impose a monetary penalty both to punish the party and to deter others from committing similar misconduct. A monetary penalty may only be distributed to investors if the court or the SEC orders that any penalty collected be placed in what is called a “fair fund” for distribution to investors who were harmed by the violation.
In an administrative proceeding, notice of a proposed plan of disgorgement or a proposed fair fund plan is published in the SEC Docket and on the SEC website. The notice states how to obtain copies of the proposed plan and explains that persons desiring to comment on the proposed plan may submit their views, in writing, to the SEC. In court proceedings, documents filed in the case are generally publicly available. The court or the SEC must approve an administration and distribution plan before any money can be distributed to harmed investors. Typically, a fund administrator or distribution agent will implement a claims process or other notification process to identify injured investors who may be eligible for distribution from a fair fund or disgorgement fund.
One step in the process of distributing money to harmed investors is the collection of civil monetary penalties and disgorgement ordered by a court or the SEC. In fiscal year 2013, the SEC collected more than $1.6 billion in monetary penalties and disgorgement that were ordered that year. When a monetary penalty or disgorgement is not paid as ordered, the SEC’s Division of Enforcement has an Office of Collections that uses every available method to identify, liquidate, and collect assets that can be used to satisfy the delinquent debt. These efforts may include sending a demand letter, negotiating a payment plan, filing a property lien, garnishing wages, or filing a contempt action in federal court.
For more information, read Rules on Fair Fund and Disgorgement Plans.
For a list of certain SEC lawsuits where a distribution of money to harmed investors may occur, including cases in which a receiver has been appointed, see Information for Harmed Investors.
For a list of SEC administrative proceedings where the SEC has required a distribution of money to harmed investors, see Distributions in Commission Administrative Proceedings: Notices and Orders Pertaining to Disgorgement and Fair Funds.
When the SEC brings a lawsuit in federal court, the SEC may ask the court to appoint a receiver. A receiver is a disinterested officer of the court who works to recover and to protect money and other assets that the defendant obtained in connection with the alleged securities law violation. If the defendant is found liable, the court may order that those assets be distributed to harmed investors.
Brokerage Account Protection
SEC rules provide extensive protections to customers of U.S. registered broker-dealers. For example, the Customer Protection Rule requires a broker-dealer to segregate a customer’s securities and cash from the broker-dealer’s securities and cash, with the objective of making customer assets readily available to be returned to customers if the broker-dealer goes out of business.
If your broker-dealer goes out of business, is a member of the Securities Investor Protection Corporation (SIPC), and owes you cash or securities, then your cash and securities held by the brokerage firm in your account are protected up to $500,000, including up to $250,000 protection for cash in the account. SIPC works to restore to customers the securities and cash that are in their accounts when the broker-dealer goes out of business, but SIPC does not protect against a decline in the value of your securities. You can visit SIPC’s website to find out whether your broker-dealer is a member and, if your broker-dealer is in liquidation under the Securities Investor Protection Act, how you can file a claim form.
Federal bankruptcy laws govern how companies go out of business or recover from crippling debt. The company’s reorganization plan will spell out your rights as an investor, and what you can expect to receive, if anything, from the company.
During bankruptcy, bondholders stop receiving interest and principal payments, and stockholders stop receiving dividends. Bondholders may receive new stock in exchange for their bonds, new bonds, or a combination of stock and bonds. Stockholders may be able to exchange their old shares for new shares in the reorganized company. The new shares may be fewer in number and may be worth less than their old shares. In bankruptcy, stockholders are last in line to be repaid.
Stockholders of a company in bankruptcy may be able to report their securities as a loss on their personal income tax returns. For more information, contact your local Internal Revenue Service (IRS) office or call 1-800-829-1040. If you don’t know whether the stock has value, ask your broker-dealer or the company.
For more information, read our publication, Corporate Bankruptcy.
Private Class Actions
In addition to, and separate from, enforcement actions filed by the SEC, a private party may file a lawsuit under the federal securities laws seeking class action status and relief on behalf of harmed investors (in certain circumstances). You may be eligible to participate in any recovery obtained through such a lawsuit. Visit the website of the Securities Class Action Clearinghouseto find out whether a private class action lawsuit relating to your investment has been filed.
Investor Bulletin: SEC Investigations.