Thousands of retail investors lose money every year due to broker misconduct or investment fraud. The amount they lose, if you consider the opportunity cost operating in many of these instances, easily runs into the several billions of dollars. In other words, the losses are staggering, and represent a huge drain on investor wealth and the smooth operating of our financial system. Incredibly, in spite of the enormous sums of money being lost by investors on an annual basis, very few of them know that they may be able to recover some of their losses from fraudsters.
Processes for Investors to Recover Lost Funds
As the SEC's Investor Bulletin recently reminded the public, there are several avenues by which investors who have been duped can seek to recover money. These include:
- SEC Fair Funds and Disgorgement Funds
- Brokerage Account Customer Protections
- Corporate Bankruptcy Proceedings
- Private Class Action Lawsuits
While these processes may brighten the hopes of investors, the SEC is quick to remind us that not every investor will or is even eligible to recover money; and that the processes involved may take a long time to come to fruition.
Fair Funds and Disgorgement Funds
You might have read articles in the news that talk about an enforcement actions by the SEC. The most eye-catching cases usually involve Ponzi Schemes. At any rate, in many of these cases, the court or SEC may order the perpetrator to disgorge the fees or gains they obtained through their deceit or fraud. Once these funds are requisitioned by the SEC or court, they are eventually distributed to investors.
In addition, monetary penalties may be levied against wrongdoers in order to punish them and deter future offenders. These penalties are collected into what is called a "fair fund" account for distribution to investors across a wide range of cases.
You've probably heard of these in relation to bankruptcy proceedings. In this case, when the SEC brings an action against a fraudster in court, a receiver may be appointed who protects money and assets belonging to the accused party. Once a judgment has been reached, that money can be distributed to victimized investors.
Brokerage Account Protection
There are numerous rules and regulations enforced by the SEC upon registered broker-dealers on behalf of the public. Some of these involve segregation of funds laws, so that customer assets may be accessible in the event the brokerage goes under. If they do, you may be able to recover your assets under the Securities Investor Protect Act.
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.
Private Class Actions
In addition to the public actions taken by the SEC, there are also private actions launched by investors or classes of investors against fraudsters (think Bernie Madoff). These actions are separate from SEC enforcement operations, but investors embroiled in such events may have the opportunity to pursue not only recovery through federal programs outlined above but also private actions.