September 27, 2004

Fair Funds

Section 308 of Sarbanes-Oxley, the "Fair Funds" provision, allows the SEC to combine civil penalties with the disgorgement obtained from a securities law violator into a fund for the benefit of the victims of the violation. The Los Angeles Times has a feature article (free regist. req'd) today discussing the SEC's use of its restitution powers. The article states that although accounts have been set up in 96 cases, amassing $2.6 billion in funds, the disbursement of those funds has proven to be a "logistical challenge" for the SEC and relatively little of the money has found its way to investors to date.

As for the impact on private litigation, the article notes that many of the supporters of the Fair Funds strategy "like the fact that the funds gave investors a means beyond class-action lawsuits to reclaim their losses." In passing the legislation, however, Congress failed to specifically address whether these funds were supposed to supplement or offset funds obtained as the result of private litigation. The practical effect of large SEC civil penalties may be the reduction of private settlements (see, for example, this post about the mutual fund trading practices cases), but it is not clear that they can be used as a direct offset.

The SEC, for its part, has not given defendants much comfort on this issue, suggesting that civil penalties should still be viewed as a punitive measure despite the Fair Funds provision. As the SEC's Director of Enforcement stated earlier this year: "That harmed investors can benefit directly from these efforts is icing on the case, so to speak." The courts may have to have the final say.

Posted by Lyle Roberts at September 27, 2004 7:08 PM | TrackBack
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