PUBLIC COMPENSATION FOR PRIVATE HARM: EVIDENCE FROM THE SEC'S FAIR FUND DISTRIBUTIONS

The SEC's primary goal is enforcing compliance with securities laws. Almost as important but less visible is the SEC's rise as a source of compensation for defrauded investors. The Sarbanes-Oxley Act of 2002 expanded the SEC's ability to compensate investors by allowing the agency to distribute collected civil fines through fair finds. Based on a couple of well-known cases, fair fund distributions have been derided as a smaller, feebler version of private securities litigation a waste of the SEC's resources on duplicative cases. This is the first empirical study to examine the population of 243 fair funds created between 2002 and 2013, through which the SEC will distribute $14.46 billion to defrauded investors. Contrary to conventional wisdom, this study finds that the SEC's distributions are neither small nor, for the most part, inefficiently circular transfers from shareholder victims to themselves. Two-thirds of fair funds compensate investors for what can best be described as customer fraud or anticompetitive behavior by financial intermediaries. Importantly, the study also reveals that private and public compensation for securities fraud are not coextensive. More than half of the time, the SEC compensates investors for losses where a private lawsuit is either unavailable or impractical. The rise of public compensation, such as the SEC's distribution funds, fills a void in securities laws that leaves many victims with no private remedy.