ANSWERS TO FAQs

A. What are my rights if a broker I work with is liquidated?


The Securities Investor Protection Corporation or “SIPC” is a special quasi-governmental corporation designed to oversee the liquidation of brokers. In the event of the failure of a securities broker, SIPC has the power to commence liquidation proceedings, and is empowered to seek in the first instance to transfer your securities account to a different broker. This is a seamless transaction for a customer. If SIPC is not able to affect a transfer of accounts, then the statute allows for a claim for the value of reported cash and securities due a customer on the date of the filing of the liquidation, less any debt owed to the broker. SIPA insures the first $500K in each account. The statute requires SIPC to advance promptly to each customer up to $500K of the value of securities held (up to $250K in cash) once a claim is approved. As additional money in the liquidation of the broker becomes available, the trustee distributes it to all customers on a pro rata basis until each customer is paid in full, before reimbursing SIPC on account of its advances.




B. What is a SIPA liquidation?


A SIPA liquidation is a special proceeding to wind up the affairs of an insolvent broker and ensure that their customers get prompt return of their securities and cash in a manner so as to avoid market disruption. Once a federal court determines that a broker should be liquidated, the wind-up proceedings are conducted under the aegis of a bankruptcy court under ordinary bankruptcy rules, except the SIPA statute contains special provisions aimed at ensuring broker customers are treated fairly and given priority over ordinary non-customer creditors of the broker.




C. Why is SIPA different from a regular bankruptcy?


SIPA liquidation proceedings are different from regular bankruptcies in four important ways. Brokers are not authorized to continue in business and must be liquidated. Customers are treated as a separate class of priority creditors. Transfer of the securities business of the broker if possible is a priority for the liquidation to enable most customers to have promptly and seamless access to their securities portfolios. And, the entire cost of the liquidation proceeding is advanced by SIPC rather than borne by customers.




D. How do I file a claim in a SIPA case?


Promptly after a liquidation proceeding is commenced, the court will notify customers in writing of the right to file claims. In a SIPA proceeding, the court is authorized to provide a simple form and method for filing claims, a more informal process than in ordinary bankruptcy proceedings. Customers who have outstanding securities or cash held by the broker to the extent their accounts have not been transferred to another broker should consider filing a claim. In addition to customer claims, ordinary creditor claims are likewise subject to the same streamlined procedure.




E. When should I not file a claim? Are there risks in filing a claim?


Failure to file a timely claim presents a risk that your claim will not be considered. However, if there is a serious risk that you may be subject to a counterclaim, then before filing a claim, you should consult an attorney. There are important strategic risks in filing a claim. Filing a claim subjects you to bankruptcy court jurisdiction, and may waive important procedural rights, including the right to a jury trial should there be a dispute about your claim, or any counterclaim. Thus, if you believe that there is a risk of a counterclaim, then you should consult an attorney before filing a claim.





1.  SIPA – Securities Investor Protection Act – special procedure for liquidation of brokers.

A. I am a small business; when should I consider bankruptcy?


Bankruptcy should be the last resort for any business debtor. Bankruptcy can be expensive and places the future of your business and your control of that business at risk. Best practice is to work out an agreed restructuring plan and payment plan with your creditors. If you are unable to pay your debts as they become due, unable to devise a restructuring plan for your business and work out a payment plan with your creditors, or you face litigation from your creditors, then you should consider bankruptcy as an alternative. Bankruptcy allows you to temporarily halt claims against you including any pending litigation, provides time for you to devise a plan to restructure your business, and work out a payment plan with your creditors. You should seek professional counsel of an attorney and/or business restructuring expert before considering bankruptcy. And, they can explore your restructuring and bankruptcy alternatives.




B. What are the benefits/ hazards of the small business bankruptcy statute?


Chapter 11 allows for business restructuring. There is a short form alternative of restructuring for small businesses. The Small Business Reorganization Act of 2019 (SBRA) went into effect in early 2020, and generally applies to businesses with up to $2,725,635 in debt. The CARES Act, enacted on March 27, 2020, temporarily expanded this debt limit to $7,500,000 for all small business debtors for a period of one year, as part of Covid relief. There are important differences between the type of restructuring relief available to a debtor under Chapter 11 and under the SBRA. Chapter 11 offers more flexible restructuring opportunities, however, because it allows for potentially greater flexibility in structuring a business plan subject to creditor approval. Under the SBRA the only plan that is permissible is a plan that commits all the net disposable income generated by the business to the creditors for repayment under a plan for a period of 3 to 5 years. While this allows for streamlined restructuring, it does limit the upside for the duration of the plan for equity holders of the business.




C. What are the costs of a small business bankruptcy?


In general, the administrative costs of any bankruptcy are material. However, the costs of small business bankruptcy under SBRA are less than a typical bankruptcy in several particulars. Creditors’ committees are not required, which means that unlike an ordinary Chapter 11 restructuring, the debtor does not have to finance the cost of the creditors and their attorneys in negotiating and responding to a plan. Further, a standing trustee is appointed that assists debtors in formulating a plan. Finally, the costs of counsel are reduced because the procedures for obtaining plan approval are more streamlined. You should consult experienced counsel before electing bankruptcy and choosing alternatives.




D. What are the options for creditors of a small business that is delinquent in payments?


Creditors should engage with a debtor at the earliest opportunity to begin discussions aimed at resolving unpaid claims or disputes. Ultimately, if a debtor is unable to pay its debts as they become due, or otherwise insolvent, some form of formal restructuring or liquidation is going to be necessary. Early engagement will enable creditors to identify their options and evaluate their collection risks. Also, for many creditors one option is to sell their claims to funds that specialize in acquiring them and will assume some of the restructuring risk in exchange for potential upsides.




E. I am a victim of a Ponzi scheme? What are my rights? Options?


If you believe you are a victim of a Ponzi scheme, report your suspicions to the SEC, CFTC, the Department of Justice or your state law enforcement authorities. Where possible, the government will investigate and intervene in the event a Ponzi scheme is in fact uncovered. Where practical, the government agencies often seek the appointment of a receiver for the benefit of creditors. When criminal misconduct has occurred, the DOJ will also seek to establish restitution funds for the benefit of victims out of recovered assets. In either circumstance, victims have rights to be heard and to notice of the proceedings, giving them the opportunity to protect their rights. In the absence of government intervention, victims have the right to collective action that can achieve similar results.




F. I am a creditor who received payments from the debtor in the ordinary course of business; but a bankruptcy trustee demands repayment. What are my rights?


In the event that you receive a demand letter from a bankruptcy trustee, you should consult experienced counsel to determine your rights. The law requires a creditor to repay what are termed preference payments made within 90 days of a bankruptcy, subject to certain important defenses and exceptions. Likewise, if you receive a demand from a trustee to return alleged fraudulent transfers, there are important defenses available to good faith creditors. Consultation with counsel is critical for you to evaluate your options and risks.




G. Does the government help victims of frauds?


All federal and state agencies have complaint hotlines to report possible fraud or wrongdoing. The government has mechanisms to help victims of fraud. Both the Department of Justice and state and federal regulatory agencies make it a priority to provide restitution to victims when possible. This is typically done through the vehicle of restitution funds where the government collects funds from wrongdoers that are distributed to victims in accordance with court supervised plans of distribution. Victims have rights to be heard as part of this process. But the government does not have the resources to investigate or intervene in every potential fraud situation. You should consult experienced counsel to explore options where the government is unable to, or declines to intervene.





2.  Fraud Workouts & Bankruptcy

A. I have received a subpoena from the SEC. Do I need counsel?


If you have received a subpoena from the SEC, this means that the SEC has authorized the staff to commence a formal investigation into possible violations of the federal securities laws. Such investigations are only opened when there is credible information of possible violations of the federal securities laws. Further, the SEC has determined that it is necessary to engage in a more formal collection of evidence than can be obtained by voluntary compliance or informal inquiries. Consultation with experienced counsel before responding is always useful. Counsel can also assist you in deciding your status as a witness or a subject of the enforcement inquiry.




B. Should I engage counsel if I am being investigated by the SEC?


The simple answer is yes. The internal process at the SEC in determining whether to commence an investigation into possible violations of the federal securities laws is rigorous. The SEC receives many complaints about possible violations and so the agency must necessarily be selective in what matters it elects to review. Further there are important rights and defenses that experienced counsel can help you evaluate. Counsel can engage with the staff on informal basis to understand the nature of the staff inquiry and focus. Finally, counsel can help you formulate your defense throughout the process of responding to an inquiry.




C. Is responding to a Wells notice in my interest?


A Wells notice is the name given to the informal administrative process by which the SEC staff gives notice to a potential respondent of a staff recommendation to the SEC regarding affirmative law enforcement action. A response is optional, but can often be very helpful. Both the response and the staff recommendation are presented to the SEC commissioners before the SEC considers and votes on whether to proceed with law enforcement action. Failure to respond at the Wells notice stage almost always results in formal law enforcement action. Thus, a Wells response is often the last best chance to persuade the agency not to commence action, or to modify the proposed action by the staff. It is also an opportunity to make an offer of settlement that has been rejected by the staff.




D. I am a victim of a securities fraud. What are my options?


All federal and state agencies have complaint hotlines to report possible fraud or wrongdoing. The government agencies could determine to investigate your complaint and take formal action. These actions could include the appointment of a receiver or other actions by the government to recover funds for the benefit of victims. But there is no assurance that the government will act in a timely manner to your benefit. You also have the option of self-help by enlisting experienced counsel to assist you either individually or jointly with other similarly situated victims, to have a receiver appointed for the benefit of creditors who could recover any losses incurred. Alternatively, you could have one or more direct actions for damages caused by wrongdoing.





3.  Securities Litigation & SEC Enforcement

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