Transparência e Governança

The Wall Street Journal

November 11, 2014, 5:57 PM ET

ByJacob Gershman

Are “fair funds” fair?

Under the 2002 Sarbanes-Oxley law, the Securities and Exchange Commission is authorized to take pools of cash collected from defendants in SEC enforcement actions and distribute the money to injured investors. Instead of ending up in the Treasury, penalties are deposited into a fair fund, functioning like a private class-action settlement.

In an op-ed in Tuesday’s Wall Street Journal, two SEC commissioners, Daniel M. Gallagher and Michael S. Piwowar, make the case against fair funds, explaining why they objected to the SEC’s majority-vote recommendation to set up a fair fund that would handle the more than $600 million collected from the SEC’s insider trading settlements with investment firm SAC Capital Advisors LP, now called Point72 Asset Management. The main thrust of the critique is their concern that the money will end up enriching the wrong people:

The only guaranteed winners will be administrators who distribute the fair fund and class-action lawyers who will take a significant cut of any funds paid to their clients. Indeed, plaintiffs lawyers mounted an unprecedented lobbying campaign after the court directed the SEC to make a recommendation about whether to establish a fair fund. Before the vote, our offices received dozens of letters from purported victims urging the commission to petition for a fair fund….

We refuse to be a part of any commission decision that will create a cottage industry for class-action lawyers, piggybacking on government investigations and targeting the disgorgement—and, even worse, government-ordered penalties—collected from defendants in SEC enforcement actions.

This decision sets a dangerous precedent. Class-action lawyers now have an incentive to round up potential victims in SEC insider trading cases and arrange a substantial contingency fee, then lead a fair-fund campaign under the guise of a grass-roots movement by harmed investors. Class-action lawyers could reap a third of the fair fund payouts thanks to the efforts of hard-working SEC staffers and the taxpayers who pay them.

David Kaplan, a lead plaintiff in the shareholder suit against SAC, says the investor plaintiffs, who support the SEC’s fair-fund proposal, have no reason to fear their money will be siphoned away by legal bills.

“Attorneys have nothing to gain by pushing for a fair-fund distribution,” he told Law Blog, pointing to a provision of the Securities Exchange Act restricting fair-fund cash from being used to pay legal fees.

The law there is somewhat unclear. A person familiar with fair-fund rules told Law Blog that plaintiffs could have negotiated fee arrangements with their lawyers that would fall outside that legal-fee restriction.

“A fundamental part of the SEC’s mission is investor protection, which includes compensating harmed investors. In insider trading cases, we can accomplish this by distributing the ill-gotten profits of insider traders,” John Nester, an SEC spokesman told Law Blog. “Congress and court decisions have agreed that harmed investors can be compensated in this way. So, in appropriate circumstances, like this one, we set up a fair fund to do just that — distribute funds directly to harmed investors, not to lawyers.”

The SEC, which has notified plaintiffs about its fair-fund plan, still needs to submit it to a judge for approval.