By Patricia Uceda, Spring 2015 Graduate Research Assistant
The SEC recently issued a new investor bulletin dealing with what investors can do if they feel they have been wronged. If an investor has been wronged, there are a number of ways in which they can recover money from the party who violated the federal securities laws. In some cases they may even be able to receive money recovered by the SEC. However, the SEC stresses that not all harmed investors will be able to recover money, and that if they do, it may be significantly less than their actual losses from the securities fraud. In addition, the process for distributing these funds can sometimes take a long time.
Fair Funds and Disgorgement Funds
When the SEC brings an enforcement action against a broker-dealer, the entity may be ordered to disgorge the money they received as a result of their illegal conduct (i.e. the ill-gotten gains). In addition to disgorged funds, the entity may be ordered to pay punitive damages in order to deter future violations of the securities law. These monetary penalties may be placed in what is called a “fair fund.” Both of these types of funds may be distributed to the investors, subject to the discretion of the SEC.
Usually, a fund administrator or distribution agent will notify injured investors who may be eligible for distribution from a fair fund or disgorgement fund. In addition, notice of the proposed plan of disgorgement or a fair fund plan will be published on the SEC website in the case of an administrative proceeding and on a court website in the case of a court proceeding.
If the SEC brings a lawsuit in federal court, they may ask the court to appoint a receiver. A receiver is a third party who will recover the money allegedly received from illegal activities and protect it during the court case. If the defendant is found liable, the funds could potentially be distributed to harmed investors.
Brokerage Account Protection
If the broker-dealer goes out of business as a result of their illegal activity and still owes you cash or securities, you may be able to recover at least a portion of their funds if the broker-dealer is a member of the Securities Investor Protection Corporation (SIPC). If that is the case, 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 covers most types of securities, including stocks, bonds, and mutual funds. However, they do not protect against losses caused by a decline in the value of the securities. Additionally, only unauthorized transactions are covered, therefore investors must demonstrate that the trade was unauthorized before they can recover. In order to do so, it is important that you send a complaint in writing to your broker as soon as you become aware of an unauthorized trade.
This coverage only applies if the broker-dealer is a member of SIPC. You should also make sure that its clearing firm is a member of the SIPC. Firms are required to tell you if they are SIPC members or not. You can also visit SIPC’s website to find out whether your broker-dealer is a member and how to file a claim form.
Private Actions Against Broker/Dealers
In addition, investors with small claims may choose to use file a claim against a broker-dealer or representative who has violated FINRA regulations for arbitration before FINRA. The Investor Advocacy Clinic handles claims involving misrepresentation, unsuitability, unauthorized trading, excessive trading, and failure to supervise for eligible investors. Go here for more information. Private attorneys may also be able to assist investors with claims against a broker or dealer if they cannot be assisted by a legal clinic.