Friday, August 24, 2012

Federal Court Authorizes Fair Fund Distribution in SEC Enforcement Action

In an order authorizing the distribution of Fair Funds to aggrieved investors as part of a court-approved consent judgment in an SEC enforcement action, a federal judge (SDNY) said that, in order to foster the speedy dissemination of future Fair Funds, the SEC should create realistic fee and cost reserves and avoid tying distributions to the payment of fund administrators.  In addition, the SEC should consider requiring fund administrators to certify that all  fees and expenses were reasonable and that no funds are being distributed to persons or entities who participated in the underlying wrongdoing or who are otherwise conflicted from receiving any benefits from the SEC.  (SEC v. Zurich Financial Services, 08 Civ. 10760 (WHP), Aug. 21, 2012.)

The SEC should also certify to courts that it has reviewed every line item, and that each of the fees and expenses sought by a plan administrator were necessary and appropriate to fulfill the distribution plan's objectives.  If the SEC is serious about compensating aggrieved investors, noted the court, it should take a much harder look at the submissions of its fund administrators. Also, no fund administrator should ever be authorized to speak on behalf of the SEC or to represent to a court that the SEC has no objection to the fund administrator's application. As the party before the Court and an agency of the Government, emphasized the court, the SEC should state its own position directly and unequivocally.


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