How Do I Get My Money Back?
Investment fraud is sadly commonplace. Every year people fall victim to Ponzi schemes, insider trading, corporate misconduct, “boiler rooms,” and other types of securities fraud. If you are the customer at the losing end of such scams, your first question will be, “Can I get my money back?”
The answer is often not so simple. While there are a number of legal mechanisms that may be used to help investors recover their funds, there are never any guarantees. Once the money is gone, it may be lost forever. However, it is important to understand the ways in which the government and the courts can help try to make you whole again.
Federal Enforcement Actions
Various government agencies regulate securities and other financial markets. These agencies, including the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have enforcement powers, which means they can bring legal action to stop fraudulent operators. These agencies may also seek “disgorgement” of any funds earned through illegal activities.
In many cases, regulators may use disgorged funds, as well as other financial penalties, to provide restitution to victims of the offender’s misconduct. The agency or the court supervising the case must provide notice to victims so they can present a claim. This does not mean every claim will be paid. The amount of any disgorgement or penalty may be insufficient to compensate all investors, and in some cases, the agency may not be legally required to use the full amount of a penalty for restitution.
Bankruptcy and Receiverships
Once securities fraud is discovered, the offending company may seek protection from angry investors and other creditors through a bankruptcy proceeding. Bankruptcy is governed by federal law and requires placement of an indebted business’s assets with a court-appointed trustee. The trustee is then responsible for liquidating business assets paying off as many debtor claims as possible according to certain legal guidelines.
Not all investors are treated equal in a bankruptcy. Many unsecured creditors and shareholders often receive nothing from a bankruptcy trustee. Bondholders usually receive higher priority, but even they may receive pennies on the dollar from their original investment. And as a general rule, regulatory fines, such as an SEC penalty for securities fraud, cannot be discharged through bankruptcy and still must be paid.
And while regulators do not play a direct role in bankruptcy cases, there are similar situations where the SEC may ask a court to appoint a “receiver” to take possession of a defendant company’s assets. The receiver’s role is to preserve the company’s assets—that is, to prevent the alleged wrongdoers from depleting the company treasury—in order to facilitate a future distribution to harmed investors.
There is little protection for an investor who purchases securities through an unregistered or unlicensed broker. Most registered brokers must be members of the Securities Investor Protection Corporation (SIPC), a non-profit corporation that insures investors against the brokerage’s failure. Similar to how the FDIC insures bank deposits, the SIPC guarantees a brokerage customer’s equity balance up to $500,000 (and cash balances up to $250,000). This does not protect against decline in the value of the equities, mind you, only the brokerage’s failure to meet its obligation to pay.
Finally, securities fraud often leads to class action litigation. These are private, civil court lawsuits brought on behalf of multiple investors against an alleged wrongdoer. If you are an investor in a company that has been sued, you may join the class action and receive part of any relief obtained. Keep in mind, however, that class actions often take a long time and often result in less-than-full recovery for individual victims.
If you are an individual and not a part of a class action, you may also seek to recover your losses through the arbitration process. Where you file and against who is typically governed by the contract or customer agreement you enter into at the start of your relationship with your stockbroker or brokerage firm. The majority of cases against stockbrokers and brokerage firms are pursued in arbitration administered by the Financial Industry Regulatory Authority (FINRA). Arbitration is typically a cheaper and quicker forum to resolve a claim however you should consult with an experienced securities attorney before you proceed.
Whatever form your relief takes, if you have been the victim of securities or stock broker fraud, and would like to try to recover your losses, it is important you have you own counsel to advise you on the next steps to take. Contact Boca Raton attorney Gregory Tendrich, P.A. if you need to speak with someone right away.