It's Payback Time
Defrauded investors can recover some of their money
Smart investors, naturally, focus on the future. But unless they start revisiting their painful losses of the recent past, millions of investors could miss out on chances to collect some serious coin.
An estimated 4 million investors lost as much as $41 billion in the massive accounting fraud at WorldCom. It may be small by comparison with their losses, but there's $7 billion waiting in two victim reimbursement funds (though payouts may be months off). Yet only about 1 million bothered to apply for their share. And millions more investors could miss their shot at a piece of at least $15 billion raised to make up for financial frauds at Enron, Adelphia,AOL, and dozens of other scandal-plagued companies.
It isn't simply apathy or inertia, says Richard Breeden, the former Securities and Exchange Commission chairman who is overseeing the agency's nearly $800 million WorldCom victims' fund. Though Breeden sent out 2.5 million notices in an effort to reach all eligible investors, he probably missed victims because some brokers didn't keep adequate records. "Far too many brokers and other institutions do not seem to pay adequate attention to helping clients know about the available funds,"he says. And some investors who did get notices may have tossed them in the belief that any reward for their effort would amount to pennies on the dollar. Actually, "investors will recover far more than in any previous frauds," Breeden says. WorldCom investors may get as much as 20 cents on the dollar from the SEC alone--and even more if they also applied to a $6.1 billion private reimbursement fund.
The deadlines have passed for reimbursement stemming from fraud committed by Wall Street analysts and frauds involving the shares of WorldCom and Lucent. But AOL investors have until February 21 to apply for a share of the $2.6 billion amassed by private lawyers. And there's still plenty of time to gather records to apply for some of the $7 billion set aside to repay Enron investors. That fund hasn't even started accepting applications yet. But get started soon, because collecting from the funds will take more effort than many investors spent deciding to buy the highflying stocks in the first place. Investors with mutual funds, even those in 401(k)'s or individual retirement accounts, should call their fund managers and remind them to collect what they are owed, says Bruce Carton, who runs an Institutional Shareholder Services division that helps firms get reimbursed.
The search. The 46 million investors who own stock directly will have to do even more. Because reimbursement fund managers often have a hard time notifying victims, investors who don't want to miss out on their share of the loot have to spend hours searching the Web, gathering their own records and filling out forms. It's time consuming because there is no central clearinghouse of reimbursement information, and each fraud may have several different funds associated with it, each with its own rules and procedures. Occasionally, the government and private lawyers work together so that investors only have to go to one website and fill out one form. But often, as in WorldCom's case, there are different funds because the government and private lawyers identify different victims and calculate damages in different ways.
Two comprehensive websites to start with are Stanford University's securities class action clearinghouse (http://securities.stanford.edu) and the SEC's, but neither is complete. The SEC lists information about most, though not all, of the $5.6 billion worth of reimbursement funds it is handling at www.sec.gov/divisions/enforce/claims.htm. Information on several important cases, such as Enron and Adelphia, is buried elsewhere on government websites. Details on funds established as a result of private litigation are scattered among dozens of websites, including those of courthouses, law firms, and big investors. The University of California hosts Enron suit information, for example. Investors should also monitor the websites of the big fund distribution companies, such as www.gilardi.com/php/Current.php, http://www.gardencitygroup.com/ cases/index.html, and http://hrsclaimsadministration.com/cases/.
For some investors, the hard work would be worth it even if there were no payoff. Robert Bolen, a certified financial planner in the Nashville suburbs, devoted a weekend to filling out five 20-page forms in order to be able to collect from the WorldCom private reimbursement fund because he felt so betrayed by WorldCom executives Bernie Ebbers and Scott Sullivan. For him, there is a satisfaction that comes from recouping at least a piece of his losses directly from the executives and companies he believes misled him. "I want to get my little pound of flesh," he says.
This story appears in the January 16, 2006 print edition of U.S. News & World Report.