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'Fair Funds' Give Investors Recourse

The SEC has collected $2.6 billion for fraud victims. But disbursing the money fairly is a logistical challenge.

September 27, 2004|Jonathan Peterson | Times Staff Writer

WASHINGTON — A federal initiative to repay investors who lost money because of corporate wrongdoing and other misdeeds has amassed $2.6 billion in just two years and has played a role in almost 100 cases settled by federal regulators.

Little of the cash has been returned to shareholders so far, but officials with the Securities and Exchange Commission maintain that the little-noticed effort is on track and ultimately will pay off big for investors who get hurt when fraud torpedoes a company's stock.

"Knowing at the end of the line that victims are going to receive tangible compensation -- it's meaningful to us, and it's certainly meaningful for people who are finally getting something back that they've lost," said Amy J. Greer, an SEC senior trial counsel who recently administered a $2-million payback for investors of Nevis Capital Management. Nevis was charged with steering shares in initial public offerings to favored accounts instead of all clients, as it had claimed.

The pots of victim compensation money, known as Fair Funds, were created through an obscure provision in the 2002 Sarbanes-Oxley corporate reform legislation. The idea was to reimburse investors who lose money -- when company executives are caught in illegal behavior, for example, or in the case of mutual funds, when trading abuses benefit favored investors at the expense of most others.

Since Sarbanes-Oxley became law, accounts have been set up in 96 cases, including one account set up for investors in WorldCom Inc. (now known as MCI Inc.) and smaller cases settled for tens of thousands of dollars, SEC officials say. For WorldCom investors, who lost an estimated $2 billion in shareholder value, the account is now valued at $684 million.

Increasingly, Fair Funds have become a routine part of the SEC enforcement effort, particularly in those cases in which loss is measurable and losers can be identified.

"Any case where we're getting money, where you can arguably say there are victims ... there's probably going to be a Fair Fund," said Linda Chatman Thomsen, the SEC's deputy director of enforcement.

Fair Funds have been used to help settle many charges of abusive trading by mutual funds. Accounts established to date include $250 million for investors in Alliance Capital Management funds and $226 million for investors in funds under the Massachusetts Financial Services Co. umbrella

Just last week officials announced that software firm Computer Associates International Inc. would hand over $225 million to pay back investors for losses it caused through criminal fraud.

Compensating investors for losses is not a new business for the SEC. Regulators have long been allowed to return a defendant's ill-gotten gains to shareholders. But in reality, such gains often went uncollected. Financial penalties, meanwhile, were shipped off to the U.S. Treasury.

Under the new approach, the SEC is allowed to use those penalties to pay back investors for losses -- dramatically increasing the pool available for restitution and easing the concern that heavy fines are a second blow to shareholders of a troubled company. Collections have been efficient, officials say, noting that many of the recent defendants are deep-pocketed corporations and investment firms.

On top of all that, some supporters of the Fair Funds strategy, including influential Republicans, liked the fact that the funds gave investors a means beyond class-action lawsuits to reclaim their losses.

"When corporate executives make out like bandits, the money ought to go back to the investors, not to trial lawyers," Rep. Michael G. Oxley (R-Ohio) said when the funds were proposed. "This money is for investors' retirement accounts, not oceanfront estates for ambulance-chasing trial lawyers."

At the same time, only a few million dollars have gone back to shareholders, even as the funds proliferate and fill up with cash.

"The pot is bigger for investors," said Dixie L. Johnson, a Washington attorney who chairs an American Bar Assn. panel on securities regulation. "The question is: Are investors getting it?"

Some are downright skeptical: "The problem with putting responsibility [for restitution] in the hands of any federal agency is that the agency will never have the resources -- or the wherewithal -- to do that adequately," maintains Pamela Gilbert, a lobbyist who represents the National Assn. of Shareholder and Consumer Attorneys.

Regulators say they are up to the task, although in some cases the wait could take years, Thomsen conceded. "It's very complicated, and everybody wants to do it in a way that maximizes recovery," she said.

In a typical case, fund administrators must determine who qualifies for reimbursement and how to compute their loss, while keeping track of such details as names, addresses and tax identification numbers for what may be long lists of claimants.

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