Fair Fund
Encyclopedia
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.
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.
of 2002 (SOX), specifically 15 U.S.C.
§ 7246(a) (the "Fair Fund Provision").
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.
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. 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.
Disgorgement (law)
Disgorgement is the forced giving up of profits obtained by illegal or unethical acts. A court may order wrongdoers to pay back illegal profits, with interest, to prevent unjust enrichment...
(returns of wrongful profits) and penalties (fines) to defrauded investors. Fair Funds were established by the Sarbanes-Oxley Act
Sarbanes-Oxley Act
The Sarbanes–Oxley Act of 2002 , also known as the 'Public Company Accounting Reform and Investor Protection Act' and 'Corporate and Auditing Accountability and Responsibility Act' and commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002, which...
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
Legal remedy
A legal remedy is the means with which a court of law, usually in the exercise of civil law jurisdiction, enforces a right, imposes a penalty, or makes some other court order to impose its will....
(it rights a wrong – it gives profits where they are due) while a penalty is a punishment
Punishment
Punishment is the authoritative imposition of something negative or unpleasant on a person or animal in response to behavior deemed wrong by an individual or group....
(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 ActSarbanes-Oxley Act
The Sarbanes–Oxley Act of 2002 , also known as the 'Public Company Accounting Reform and Investor Protection Act' and 'Corporate and Auditing Accountability and Responsibility Act' and commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002, which...
of 2002 (SOX), specifically 15 U.S.C.
Title 15 of the United States Code
Title 15 of the United States Code outlines the role of the commerce and trade in the United States Code.Notable legislation in the title includes the Federal Trade Commission Act, the Clayton Antitrust Act, the Sherman Antitrust Act, the Securities Exchange Act of 1934, the Consumer Product Safety...
§ 7246(a) (the "Fair Fund Provision").
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.
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. 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.