Before answering your question, I should note that I am not a securities attorney and that, other than quotes from SEC documents and the WSJ, what I have written is my opinion only. If the money involved warrants it, you should consult an attorney.
I will discuss only the possibility of receiving money back from the SEC. Other paths that shareholders can pursue are a class action lawsuit or their own individual lawsuit. I have no comments on the merits of these approaches.
I guess the short answer is that the odds of seeing any money back from the SEC are better than usual. Before I raise anyone's hopes needlessly, I should hasten to add that IMO the odds are still crummy. In the usual case however the odds are abysmal. In addition, even if one sees some money back from the SEC, it will unfortunately probably take a long, long time.
Here's the long answer:
In addition to participating in a class action suit or initiating you own lawsuit there is a third course which may potentially bring some measure of restitution of your EOSC losses. It is alluded to in one of my posts ( #reply-7414504 ), namely disgorgement by the alleged wrongdoers. There is even some modest good news regarding disgorgement, namely that: In addition to the (very considerable) funds frozen in the U.S. and abroad, to date, the Commission has recovered $2.3 million in disgorgement, interest and penalties from settling defendants, relief defendants and potential relief defendants. (see #reply-7414504 ). Disgorgement funds are sometimes used to provide restitution to those who have lost money in the corresponding scams. Thus the fact that a considerable amount has already been disgorged and that the frozen funds presumably also might be candidates for disgorgement (at least partially) is IMO good news. However, there are a number of very important features of the disgorgement process (the bad news) that you should be aware of:
1. It will likely be a very long time before any EOSC shareholders see any of the proceeds of disgorgement. The primary reason is that per the SEC:
Since the development of a disgorgement plan may be a significant undertaking, it is not required in most proceedings until the funds to be disgorged have been transferred from the control of the respondent and, if the disgorgement order is subject to appeal, until after the appeal is decided. ... For example, in a case with multiple respondents, where some respondents settle and others choose to litigate, it may be appropriate to await the resolution of the case against all respondents before making a determination as to the disposition of disgorgement funds received from those who settled.
The EOSC case has a number of defendents. Waiting for them all to exhaust their appeals and pay up is likely to be a very long process. Even after this happens, there will be an additional waiting period until a plan for the disposition of the disgorged funds is developed and approved (notice of the plan will appear in the daily SEC digest available on line at sec.gov ). In light of the fact that the civil suit has been stayed pending possible criminal charges, the delays may be longer than usuual.
2. Those who have lost money will probably not be made whole by disgorgement. However, in this particular case, the amounts frozen (and hence potentially partially dosgorgable?) or already disgorged do appear to come close to SEC's reckoning of the $12 million in profits by the wrongdoers. The $2.3 million paid to date consists of disgorgement, penalties and interest. I'm not sure whether the penalty portion is available for restitution (I suspect it isn't but don't really know one way or the other). I believe the interest component is normally used to pay the administration costs of the disgorgement program (and if it is insufficient, a portion of the disgorgement is used).
3. According to the SEC, the primary objective of disgorgement is denial of the use of the ill gotten gains by the wrongdoer, not restitution to the victims of the scam. This emphasis could be important - for example, if the eventual proposed disgorgement plan favors one set of EOSC investors over another.
4. I'm not clear on how the possible conflicts between a disgorgement plan and a class action suit would typically be resolved. The most pertinent SEC rule appears to be rule 611 about which the SEC has made the following comment:
COMMENT (b): To minimize the costs of administering a plan of disgorgement, the Commission has in certain civil injunctive proceedings consented to the payment of disgorgement funds obtained as the result of a Commission initiated proceeding into a fund established for the benefit of persons in related private civil action. See, e.g., SEC v. Levin, No. 3-92CV-399D (N.D. Tex. Mar. 2, 1992) (settlement directed payment into court registry); SEC v. Boesky, No. 86-CIV-2299, slip op. (S.D.N.Y. Nov. 14, 1986) (settlement directed payment to escrow agent). Rule 611 provides for a similar disposition of disgorgement funds obtained in an administrative proceeding. Transfer of disgorgement funds into a fund established in a judicial proceeding may be subject to conditions on the use of the funds. For example, the Commission has routinely prohibited the use of any funds obtained in a Commission initiated action to pay attorneys' fees in a private lawsuit.
This quote as well as the earlier SEC quote are taken from a document describing SEC rules of practice: sec.gov. This is a large document, some of which concerns disgorgement, and much of which does not. The relevant rules concerning disgorgement are the 600 series. Here is a brief summary from the quoted source:
Disgorgement. The 600 series of the revised Rules contains new provisions governing payment of disgorgement, interest and penalties. Rule 600 requires prejudgment interest to be assessed on any sum required to be paid pursuant to an order of disgorgement. The rate of interest is set at the IRS underpayment rate and compounded quarterly unless the Commission specifies a lower rate with respect to funds placed in an approved escrow. Under Rule 601 unless otherwise provided, funds due pursuant to an order by the Commission requiring the payment
of disgorgement, interest or penalties must be paid no later than 21 days after service of the order. After disgorgement has been paid, a proposed plan of disgorgement will be submitted pursuant to Rule 610.
Rule 611 lists the required elements of such disgorgement plan. A plan may provide for distribution of funds to investors or to a court registry or court-appointed receiver for injured investors. Where return of disgorged funds to investors is not justified, funds may be paid to the U.S. Treasury. Rule 612
requires that notice of a proposed plan be published in the SEC News Digest and the SEC Docket and other publications as required. A plan may be approved, approved with modifications, republished for additional comments or disapproved pursuant to Rule 613. Rule 614 contains provisions governing the
administration of an approved plan.
Rule 620 addresses conditions under which a non-party will be granted leave to intervene or to participate in a proceeding for the purpose of challenging a disgorgement order or plan of disgorgement. The Rule provides that no person shall be granted leave to intervene or to participate for such a purpose based
solely upon that person's eligibility or potential eligibility to participate in a disgorgement fund or based upon any private right of action such person may have against any person who is also a respondent in an enforcement proceeding.
Persons claiming an inability to pay disgorgement, interest or a penalty must do so in accordance with Rule 630. A respondent who asserts inability to pay may be required to file a sworn financial statement and to keep the statement current. Failure to file a required statement may be deemed a waiver of the claim of inability to pay.
I hope I have not given an overly optimistic view of the likelihood of seeing restitution any time soon. However, I do believe that there is slightly more reason for optimism in the EOSC case. All too often, the SEC gives a disgorgement decision however no funds (or minimal funds) are actually provided by the wrongdoers. The extent of funds already disgorged or potentially disgorgable is somewhat promising compared with the typical situation. The follwing Wall Street Journal article may be of interest in this connection:
SEC Collects Only Half Its Financial Penalties
By Michael Schroeder
Staff Reporter of The Wall Street Journal
08/26/98
The Wall Street Journal
(Copyright (c) 1998, Dow Jones & Company, Inc.)
WASHINGTON -- The Securities and Exchange Commission collects only about half of the financial penalties it imposes on securities-law violators, leaving $2.5 billion uncollected over the past 13 years. The SEC garners plenty of favorable press when it orders violators to cough up ill-gotten gains and pay millions of dollars in fines and restitution to victims. But an analysis of SEC data shows the agency has actually collected only $2.7 billion of the $5.2 billion levied from 1985 to 1998.
Violators have lots of different ways to frustrate SEC collection. Some file for bankruptcy protection. Some plead poverty. Some go to prison, and some die. "We're not a collection agency," says Joan McKown, chief counsel of the SEC enforcement division. "We do the best we can with our limited resources."
Collection usually falls to the SEC attorneys who try the cases. The agency has just one full-time collector, stationed in New York, and has turned over $78 million of its toughest collections to the Treasury Department, which itself rarely collects the owed funds. Most of the money that does get collected goes into the U.S. Treasury, with little being paid to aggrieved investors. One large exception is a nearly $1 billion settlement by Prudential Securities in 1993, which created a pool from which investors in the firm's limited partnerships could receive restitution.
Among the biggest nonpayers are some major alleged purveyors of small-stock fraud. Robert Brennan, former chairman of First Jersey Securities, has spent three years in court trying to overturn the SEC's $72 million judgment. Meyer Blinder, former chairman of Denver-based Blinder Robinson & Co., has never paid the $24 million the SEC fined him for penny-stock fraud in 1992.
The SEC has put off collection efforts to allow a bankruptcy-liquidation trustee to use assets from Mr. Blinder and his defunct company to pay victimized investors. John Winston, Mr. Blinder's attorney, did not return a phone call.
As part of stepped-up efforts to stamp out burgeoning small-stock fraud, the SEC has won court judgments against many small firms and their principals in cases alleging stock manipulation. Last year, for example, an administrative law judge imposed penalties for violations against R. Rimson & Co. of New York for $9.5 million, and against its principals, Moshe Rimson and Alex Shindman, for $1.9 million and $400,000, respectively. The firm was liquidated after the action and
ceased operating. The SEC has been unable to collect from the brokerage firm or Messrs. Rimson and Shindman and has turned over collection to the Treasury.
Leon Lipkin, the attorney for Mr. Rimson and his defunct brokerage firm, said that Mr. Rimson died last year and that the firm has no assets. Aegis Frumento, an attorney who represented Mr. Shindman, said, "The SEC is entitled to collect whatever it is owed."
About 90% of the judgments against violators represent illegal gains. The SEC determines how much violators pocket, for example, from a stock-manipulation scheme or insider trading. The agency can impose additional penalties in egregious cases. Investors who trade stock on illegal information often are ordered to pay three times their profit.
The process for nailing violators also can vary. Cases are heard by a federal judge or administrative law judge, but the SEC settles most cases with defendants to avoid costly court battles. Defendants agree to pay a chunk of money, without admitting or denying charges. Yet even after agreeing to pay, many of these violators still don't.
Three-quarters of the $2.7 billion the SEC has collected came from Wall Street's best-known players and firms, who are "most interested in maintaining their reputations and staying in the industry," the SEC's Ms. McKown said.
Record fines grew out of the insider-trading scandal of the 1980s. Michael Milken, the former junk-bond king, owns the distinction of paying more than any other individual, with two separate judgments totaling $447 million in illegal gains and penalties. His former employer, the defunct Drexel Burnham Lambert, paid $350 million. Convicted insider-trader Ivan Boesky paid $50 million to settle SEC charges.
Many companies and individuals evade payment by seeking protection under the bankruptcy laws after they get hit with big judgments. The SEC normally goes to court to recoup some of the money, but must stand in line with other creditors.
Sometimes the SEC itself postpones payment. Steven Hoffenberg, the New York bill-collection maven, owes $55 million, but the SEC has delayed collecting it while he serves a 20-year prison sentence that began last year. Interest keeps accruing while defendants are in prison. Mr. Hoffenberg admitted that he defrauded investors of $460 million before his company, Towers Financial, collapsed in 1993. "We obtained the order in the event he obtained money in the future," the SEC says. "Recently we learned that Hoffenberg has $30,000 and have brought an action to recover the money." Mr. Hoffenberg now represents himself. He couldn't be reached.
One debt that may be tough to collect is $3.8 million owed by Irwin "Sonny" Bloch. Mr. Bloch, who hosted a national radio show on investments, admitted in 1996 that he took money under the table to tout stocks. Mr. Bloch died of lung cancer in March. The SEC is trying to get money from his estate, but holds out little hope of procuring much. A recent check of a safety-deposit box used by Mr. Bloch yielded little of value. The attorney for Mr. Bloch's estate could not be reached.
Often the SEC is unable to collect because violators don't have any assets. The agency has waived $768 million since 1985 after receiving sworn affidavits attesting to the defendant's inability to pay. (If an individual lies about assets, the SEC can seek criminal contempt charges.) In addition, the agency has formally written off $230 million it figures it will never collect.
Some cases just aren't worth the SEC's time. Alicia Grady Skulski of West Palm Beach, Fla., owes $168.88, the smallest unpaid settlement outstanding on the SEC's books. She was assessed two years ago for her part in an alleged fraud involving an initial public offering of a shell company. Her husband, Anthony Skulski, who hasn't paid $4,000 he owes in the same case, said the matter of the couple's assessments "is no business of anyone's." Mr. Skulski says he has "worked something out" with regulators. Not true, an SEC spokesman says. The debt hasn't been formally written off; an SEC investigator periodically calls the Skulskis to ask them to pay up.
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The Collection Plate
AMOUNT
BIGGEST PAYERS(in millions)
Prudential Securities $947
Michael Milken 447
Drexel Burnham Lambert 350
Salomon Brothers 222
Ivan Boesky 50
AMOUNT
BIGGEST NONPAYERS(in millions)
Gary Naiman $164
Steven Wymer 89
Robert Brennan 72
Paul Bilzerian 63
Graystone, Nash Inc. 61
Note: Messrs. Naiman and Wymer are serving prison terms. Messrs.
Brennan and Bilzerian are challenging the fines in court. Graystone Nash
went out of business in 1988, but the SEC is pursuing the company's
principals for the money.
Source: SEC |
