What Investors Need to Know About SEC Receivers

Similar to a bankruptcy case, a SEC receiver involves an insolvency proceeding. However, unlike a bankruptcy case, a receivership claim is not a straightforward process since it may involve numerous parties or intricate interests based on multiple actions about the company’s assets. SEC Receivers are common in cases involving ponzi schemes[1]. 

Given the complexities surrounding a receivership claim, an independent third-party receiver may be appointed by the court to assist with handling the company’s assets regarding the claims.

What is an SEC Receiver?

A receiver is a neutral third-party custodian appointed by the court to act as an officer through the recommendation of the SEC. Typically, the SEC recommends to the court that SEC receivers be appointed in fraud cases if they believe that a company or an individual may squander, hide, or waste corporate property and assets.

A court grants SEC receivers certain powers including, taking legal control of and protecting assets, filing claims on behalf of an entity placed into a “receivership,” and distributing assets to defrauded entities including, but not limited to, investors, claimants, or creditors through a court-approved plan. More so, a receiver has the discretion to marshal, manage, and liquidate the receivership company’s assets provided that they account for all the receipts and payment. Moreover, since the court-appointed receiver is subject to a fiduciary duty, they must act to benefit the stakeholders and the court.

Who Designates the Receiver? 

The federal district court judge handling a SEC receivership case can appoint a receiver based on the SEC’s filing of an application or petition with the court regarding their recommendation for a receiver to be assigned to the case. The SEC generally provides names of qualified candidates of the court.

Even though receivers are typically recommended by the SEC, it is essential to note that they are not subject to the SEC’s power as they are not SEC employees. Instead, they are independent custodians that report to the judge on the receivership case.

What is the Scope of the Receiver’s Authority? 

A SEC receivers’ authority is pretty broad about the company’s assets, provided that it is within their fiduciary duties. Such general power conferred to the court-appointed receiver includes the ability to sue on behalf of the receivership and gather, manage and liquidate receivership assets on behalf of potential creditors and harmed investors. Subject to their fiduciary duties to act in “good faith” and within reasonable diligence, a receiver is also required to report to the court periodically regarding the property entrusted to them.

How are Court-Appointed Receivers Compensated? 

Upon the court’s approval, a court-appointed receiver is paid from the assets of the receivership estate provided that it is reasonable compensation for their services, along with any costs and expenses they had incurred related to the receivership case.

Typically, a court-appointed receiver must submit an itemized report detailing their service fees, expenses, and costs incurred. The SEC and other interested parties to the receivership estate can object to the compensation reported by the court-appointed receiver. However, the court by itself determines the amount that their court-appointed receiver is entitled to be paid.

How Would I Know If a Court-Appointed Receiver is Assigned in My Case? 

Generally, the court-appointed receiver will reach out to you with specific instructions. Otherwise, you can check the SEC page under Information for Harmed Investor, the court handling your case’s website, or the receiver’s website to see if a court-appointed receiver has been assigned to your case.

How Are Company Assets Handled in an SEC Receivership?

The court-appointed receiver acts as the guardian of the receivership estate. Part of their job is that the receiver will have to determine and set a plan on how to distribute the company’s assets. This distribution plan typically covers how to make payments to the injured investors. The court will consider the receiver’s proposal and approve if they believe it is fair and reasonable.

In these distribution plans, courts generally favor a proportionate approach based on the investors’ net losses. However, the courts can choose whatever allocation plan they deem appropriate based on the circumstances and facts of the case.

What Should I Do If I Am Entitled to Receivership Assets? 

Suppose a court-appointed receiver has reached out to you as a potential claimant to the assets they are handling. In that case, it is essential to read the notification sent by the court-appointed receiver carefully.

This notification includes essential details on the claim you may be entitled to, such as claim forms that must be filled and submitted, either by mail or online. There might also be additional required steps to provide a verification email or link or expressly accept a determination letter.

Typically, claim forms require that a potential claimant provides relevant information such as the amount invested, the amount received in interest, repayment of principal, and documentation proving your claim. The form would also include a deadline on when the claim must be filed. It is important to remember that the receiver would very likely deny the claim if the form has not been filed by the claim deadline.