As I discussed here last week, the SEC recently stated its intention to create a Fair Fund to distribute the funds from its $602 million insider trading settlement with SAC Capital to the people who were on the losing side of certain trades with SAC. This week, that decision was met by an unusual "dissent" from two SEC commissioners--Daniel M. Gallagher and Michael S. Piwowar--that they co-wrote for a November 10, 2014 Opinion piece in The Wall Street Journal.

Commissioners Gallagher and Piwowar wrote that they strongly object to the recommendation of a Fair Fund in this situation because, to summarize:

 

in an insider trading case, "it will be incredibly difficult and expensive to identify and compensate the victims. In fact, it may not be possible to know who was harmed;" 

the only guaranteed winners will be claims administrators who distribute the fair fund and class-action lawyers "who will take a significant cut of any funds paid to their clients." The Fair Fund would therefore become a "misguided, massive wealth transfer to plaintiffs lawyers;" and

doing so signals that the SEC may seek a Fair Fund in every insider trading case going forward. 

In a brief the SEC filed today in support of its motion that the Court should create a Fair Fund, however, the SEC argued that Section 21(d)(4) of the Exchange Act will ensure that the $602 million goes to investors, not lawyers. Section 21(d)(4) provides:

(f) Prohibition of attorneys’ fees paid from Commission disgorgement funds

Except as otherwise ordered by the court upon motion by the Commission, or, in the case of an administrative action, as otherwise ordered by the Commission, funds disgorged as the result of an action brought by the Commission in Federal court, or as a result of any Commission administrative action, shall not be distributed as payment for attorneys’ fees or expenses incurred by private parties seeking distribution of the disgorged funds.

Although only $274,972,541 of the $602 million settlement is earmarked as disgorgement (with the rest being either prejudgment interest ($51,802,381.22), or a penalty ($274,972,541)), the SEC argued that the presence of this disgorgement amount in the settlement means that the attorneys' fee prohibition in Section 21(d)(4) applies to the entire $602 million.

 

The SEC also argued that unlike a typical insider trading case, it would be feasible to identify and compensate the victims in the SAC case because the $602 million had already been collected, the case involved only two securities and all of the trading at issue occurred in a discrete seven-day trading period.

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