Securities Class Actions Settlements and SEC Fair Funds: What’s the Difference?
By: Mike Lange, Esq., Financial Recovery Technologies
Securities class action settlements and Securities and Exchange Commission (SEC) Fair Funds may look similar, however, the actors involved – and their motivations – differ in fundamental ways resulting in challenges for participating institutional investors.
This is an excerpt from NCPERS Winter 2023 issue of PERSist, originally published January 5, 2023.
Securities class action settlements and Securities and Exchange Commission (SEC) Fair Funds look similar. Both involve compensation to harmed investors, sometimes from the same defendants. Both use third party administrators for claim submissions with similar forms and procedures. However, the actors involved – and their motivations – differ in fundamental ways resulting in challenges for participating institutional investors.
Securities class action settlements and SEC Fair Funds differ with respect to who is in charge and their relationship to harmed investors.
In securities class action settlements, the lead plaintiff and counsel prosecute claims on their behalf. When cases settle, lead counsel engage and manage third-party administrators for claim submission under supervision by the courts.
Fair Funds are created in connection with resolutions of either litigation in federal courts by the SEC against defendants, or internal SEC enforcement proceedings against them. If resolutions include disgorgements, Fair Funds are created, and the SEC engages and manages third party administrators for claim submission.
The actors involved in the recovery efforts for securities class action and SEC Fair Funds have different goals.
In a securities class action, the lead plaintiff and counsel are fiduciaries to the class solely focused on maximizing their compensation. Both they and the courts overseeing distributions strive for maximum notice, inclusion, and participation. Courts preliminarily approve settlements, then notify class members and hold hearings on final approval so class members can weigh in on matters including proposed distribution plans. Claimants can challenge the disposition of their claims and if necessary, escalate issues to class counsel and the court.
By contrast, the SEC is a government enforcement agency and not a fiduciary for harmed investors. Compensation is only one aspect of its resolutions. The SEC can impose other sanctions including fines and penalties, cease and desist orders, and/or serving as executives at publicly traded companies. The defendants' behavior before or during prosecutions – including remedial efforts to prevent recurrence – can reduce monetary punishments. The SEC allocates recovered funds between fines and penalties, which it keeps, and disgorgements, which return money to investors.
Administrative requirements are different and pose operational challenges.
Fair Funds have additional administrative requirements that are not seen in securities class action settlements that can increase filing burdens and make investor participation more challenging. These include:
• Greater documentation burdens: In securities class actions, administrators use an audit approach for trade substantiation, targeting document requests at high-risk claims – those from unverified sources and/or involving large payouts. By contrast, some Fair Funds require full documentation from all claimants for all trades.
• Faster and tighter administrations: The SEC runs faster administrations with stricter compliance requirements. By contrast, in securities class action settlements, it's not uncommon for courts to permit exceptions that expand participation. For example, courts may accept late filed claims if distributions have not yet occurred and/or there is no significant prejudice to other class members.
In sum, securities class actions are prosecuted for the benefit of harmed investors. Lead plaintiffs, class counsel, and courts supervising administrations do so as fiduciaries to class members, with a bias towards inclusion and maximum participation. By contrast, the SEC prosecutes claims to achieve a range of goals, only one of which is victim compensation. The SEC is not a fiduciary for harmed investors, and Fair Funds can focus on goals that reduce inclusion and participation.
About the author:
Mike Lange is Financial Recovery Technologies' Senior Vice President of Worldwide Litigation and is responsible for helping clients navigate the challenges involved in evaluating litigation opportunities, analyzing the risks and opportunities, and helping them build a comprehensive shareholder litigation program and policy. He also serves as a subject matter expert and regularly shares insights into the class action landscape to clients, prospects and the broader investment community.