For Wronged Investors, It's Payback Time
The SEC Begins Doling Out Funds From Settlement Pools, But the Wait Can Be Long
By Deborah Solomon, Staff Reporter
Thursday, July 7, 2005

Over the past few years, the Securities and Exchange Commission has won billions of dollars in fines from companies accused of financial wrongdoing, with most of the money being earmarked for defrauded shareholders.

Investors, though, may have to wait years to get their piece of the pie.  Part of the slow progress is attributable to the complexity of the settlement process. In the high-profile WorldCom case, for example, the deadline for investors to file claims was just extended by one month.

The SEC has set up so-called Fair Funds in dozens of cases, ranging from a $750 million settlement with WorldCom, now MCI Inc., to a $250 million fine against Qwest Communications International Inc.  Time Warner Inc. recently agreed to pay $300 million to settle alleged accounting improprieties, and the banks accused of aiding fraud at Enron Corp. are paying more than $400 million.  A host of mutual-fund companies have also agreed to pay hundreds of millions of dollars to resolve charges that they harmed investors with conflicts of interest and abusive trading practices.

Under the 2002 Sarbanes-Oxley law, that money can be returned to investors instead of going to the Treasury.  With the law now on the books for nearly three years, many of the settlements are beginning to work their way through the SEC's system and will soon be candidates for distribution.

All told, the SEC has ordered some $5.5 billion in penalties through the Fair Funds program, but so far, only $82 million has been returned to investors.  The money paid out so far includes $25 million from Lucent Technologies Inc. and $50 million from Massachusetts Financial Services Co., a mutual-fund company.

Separately, the landmark Global Research Analyst Settlement -- which resolved claims that analysts at major brokerage firms misled investors with faulty research -- provided $432.75 million to be returned to investors.  Those funds are expected to be distributed by early next year.  In late May and early June, the fund administrator sent out more than 73,000 letters notifying investors who may have valid claims.

Investors who owned stock in a company or owned a mutual fund that was charged by the SEC can check the SEC's Web site ( to see if a settlement fund has been established.  If your company isn't listed there, it can mean that either the distribution plan or a fund hasn't yet been established.  Advertisements are also sometimes run in national newspapers announcing the settlement funds.

The requirements to participate in each fund vary depending on criteria that the SEC and a court establish, but making a claim is generally relatively simple.

In the case of WorldCom -- one of the first Fair Funds to be established and one of the furthest along -- the process of returning money is expected to take about two years.  Oversight of the fund is being handled by Richard Breeden, a former SEC chairman who is also WorldCom's corporate monitor.

Payouts from that fund are expected next summer.  To participate, investors need to download and complete a 15-page "Proof of Claim" form from the WorldCom Victim Trust Web site ( and return it by Aug. 19.  Investors must include brokerage statements that list all purchases and/or sales of WorldCom securities during the fraud period.  So far, about 180,000 investors have filed claim forms.

Restitution is available only to shareholders who bought one of WorldCom's 34 securities, which consist of two classes of common stock, five classes of preferred stocks and 27 bond issues, on or after April 29, 1999, and held it as of the close of trading on June 25, 2002 -- the day the company revealed its multibillion-dollar accounting fraud.  The SEC limited eligibility to that "fraud period" because April 1999 is when regulators say WorldCom began its accounting fraud, which artificially boosted the price of the stock.  Under the SEC's theory, investors who bought WorldCom shares on or after April 29, 1999, paid inflated prices because the stock was being boosted by the company's fraudulent financials.

Shareholders must also have suffered a net loss in order to get restitution.

Investors aren't expected to be made whole by the SEC settlement, and the amount of money they get back will depend on several factors, including how far into the fraud they bought their securities and how many people file claims.  But the payout is expected to be tens of cents on the dollar, depending on how many valid claims are filed.

Returning settlement money is a complicated and time-consuming process.  Before a single penny can be returned, the SEC must develop a so-called distribution plan that spells out which investors are eligible for restitution and how their losses should be calculated.  It usually hires a lawyer or academic to help develop the plan and administer the fund.

But payouts can be delayed by the complexity of the process, as well as by the SEC itself, which often waits to resolve a case entirely or at least collect a certain amount of money before crafting a distribution plan.  That's been the case with some of the largest settlements, including Qwest, Enron and Xerox Corp.  Efforts to develop distribution plans for money collected from some of the nation's largest mutual-fund firms are under way.

Some distributions, such as Bristol-Myers Squibb Co. and Lucent, move more quickly because they are paired with a related class-action settlement that's set to be doled out to a similar set of investors.  SEC officials have combined about six of the Fair Funds with related class-action settlements.  The result, they say, is that investors can get their money back quicker and with fewer costs.  "We try to pair them when possible in an effort to save money and time," says David Kornblau, chief litigation counsel at the SEC.

In the Bristol-Myers case, for instance, the SEC opted to have its $150 million settlement administered by the Garden City Group, which was already handling the $300 million class-action settlement that Bristol reached with shareholders in July 2004.  The distribution is expected to occur sometime this fall.  Garden City Group has so far submitted one bill for $124,253.80 to the SEC for its work on the case, though additional bills are expected.  The money being used to pay Garden City is coming from interest earned on the $150 million, SEC officials said.

The $25 million Lucent settlement, reached with the SEC in May 2004, was distributed to investors in May, along with funds from a $600 million class-action settlement.  Fees for distributing the SEC's portion are expected to be less than $3,000.

Write to Deborah Solomon at

Where to Get Your Money Back

The Fair Funds were established by the Securities and Exchange Commission to return money to individuals who invested in companies and mutual funds accused of financial wrongdoing. Here are some of the largest Fair Funds and their status:


     $750 million                     Summer 2006  (expected)

Bristol-Myers Squibb
$150 million           Fall 2005  (expected)

Qwest Communications International

                     $250 million (half has been
                      paid and another $125
                      million expected in December
                      2005)                                   No distribution plan has
                                                                  been proposed or approved

Global Research Analyst Settlement

                     $433 million from 12 Wall
                     Street firms                          Expected by January 2006

Bank of America
$375 million                     Distribution plan is being developed

Invesco Funds Group and AIM Advisors

                           $375 million                      No distribution plan has been approved

Pilgrim Baxter & Associates

                           $250 million                       Distribution plan being developed

Massachusetts Financial Services

                           $50 million                       Distributed back to MFS funds in                                        
                                                                   February 2005.  Plan closed

Lucent Technologies                           
                           $25 million                         Distributed to investors in May.
                                                                     Plan closed

Source: Securities and Exchange Commission; WSJ research,,SB112069885934679133,00.html