Fair Fund

A Fair Fund is a fund established by the U.S. Securities and Exchange Commission (SEC) to distribute disgorgements (returns of wrongful profits) and penalties (fines) to defrauded investors. Fair Funds were established by the Sarbanes-Oxley Act of 2002.

Purpose

Fair Funds hold money recovered from an SEC case, then choose how to distribute the money to defrauded investors, and does so, then terminates.

Note that disgorgement is a remedy (it rights a wrong – it gives profits where they are due) while a penalty is a punishment (it punishes the fraud independently of, and, in combination with disgorgement, over and above their illegal gains). The distribution of disgorgements by the SEC existed prior to Fair Funds; the distribution of penalties is what is novel about Fair Funds. In the absence of penalties, the SEC may instead use a Disgorgement Plan to distribute the disgorgement.

History

Fair Funds were established by the Sarbanes-Oxley Act of 2002 (SOX), specifically 15 U.S.C. § 7246(a) (the "Fair Fund Provision").^[1] Prior to Sarbanes-Oxley, the SEC did not distribute civil penalties to defrauded investors; rather, the penalties were paid to the US Treasury. SOX gave the SEC the right to distribute penalties to defrauded investors, at its discretion.^[1]

Prior to Sarbanes-Oxley, civil penalties obtained by the SEC based on actions under the securities laws were paid to the United States Treasury and were not available for distribution by the SEC to investors who were injured by the securities fraud.^[2] The Fair Fund Provision provided the SEC with flexibility to distribute, at its discretion, civil penalties to defrauded investors.

Important case law in this regard was Official Committee of Unsecured Creditors of WorldCom, Inc. v. Securities and Exchange Commission, 467 F.3d 73 (2nd Cir. 2006) ("Committee v. SEC" or "WorldCom"), which found in favor of the SEC, affirming its right to discriminate between classes of investors, here discriminating in favor of investors who recovered less in bankruptcy court, and against those who received more.^[1]

References

1. (Richardson & Mack)
2. (Larsen, Buckberg & Lev 2009, footnote 9 and references there)

• Current SEC Rules of Practice and Rules on Fair Fund and Disgorgement Plans (January 2006; corrected March 2006) (PDF), 2006, from SEC Rules of Practice
• Richardson, Robert G.; Mack, Jeremy S., It Isn't What It Used To Be, But the SEC Still Protects Shareholder Interests (PDF)
• Larsen, Jan; Buckberg, Elaine; Lev, Baruch (January 2009), United States: SEC Settlements: A New Era Post-SOX