As prosecutors and regulators have brought more fraud cases to light, victims are still grappling with how to receive compensation for their losses. Victim compensation can depend, in large part, on how the government and the courts treat the fraud. The government and the courts have different potential methods to confiscate funds from perpetrators to compensate victims. This article will focus on: (i) useful steps that victims of fraud should take and (ii) two government strategies that can help in compensating victims of fraud, namely, the appointment of a Securities Investor Protection Corporation (SIPC) Trustee and asset forfeiture.

Steps to Take for Fraud Victims

Victims of fraud should speak to the government, either on their own or through an attorney, to determine what the government needs from the victim to help it successfully prosecute the case. Victims should gather all relevant documentation, including proof of all losses, all monetary transactions with the perpetrators, proof of money going to and from the victim to the perpetrator and any communications with the perpetrator.

The victim should also communicate his/her needs in terms of compensation. In special cases of hardship the government may speed up the process of compensating victims to give relief to those victims whose needs are greatest. For example, in U.S. v. Madoff, the SIPC Trustee processed hardship claims before other claims from other victims. As of June 30, 2009, the SIPC Trustee approved 152 hardship claims; the hardship claims were decided within 20 days after receipt unless more information was needed. Only individuals could make a hardship claim and the Trustee considered the following types of hardship: “the inability to pay for necessary living expenses (food, housing, utilities and transportation); inability to pay for necessary medical expenses; necessity to return to work, at the age of 65 or older, after having previously retired from former employment; declaring personal bankruptcy; and inability to pay for the care of dependents” (Trustees First Interim Report filed July 9, 2009).

The Role of the SIPC Trustee

In its brochure on its website, SIPC states that it “is the first line of defense in the event a brokerage firm fails owing customer’s cash and securities that are missing from customer accounts”. SIPC helps individuals whose money, stocks and other securities are stolen by a broker or put at risk when a brokerage fails for other reasons. From its creation by Congress in 1970 through December 2007, the SIPC advanced $508 million in order to make possible the recovery of $15.7 billion in assets for an estimated 625,000 victims.

SIPC “acts as trustee or works with an independent court-appointed trustee in a missing asset case to recover funds”. SIPC guarantees that all “customers of a failed brokerage firm receive all non-negotiable securities” that are registered or in the process of being registered in their names. SIPC also has a reserve “available to satisfy the remaining claims of each customer up to a maximum of $500,000” for invested securities and a $100,000 maximum on claims for cash.

A case in point is that of the SEC v. Bernard L. Madoff. The court appointed an SIPC Trustee, Irving Picard, and also froze the assets of individuals and entities involved in the criminal activity including Bernard Madoff and his company, Bernard L. Madoff Investment Securities LLC, and empowered the SIPC trustee to search and seize other assets involved in the criminal activity. The court ordered the Trustee to monitor the assets seized, to try and find more assets and to distribute the assets seized to victims. Between December 1995 and December 2008, when Madoff was arrested, it is estimated that the victims’ net losses were $13.2 billion dollar, according to the Wall Street Journal.

Asset Forfeiture

The goal of asset forfeiture, according to the Department of Justice, is “to enhance public safety and security ... by removing the proceeds of crime and other assets relied upon by criminals and their associates to perpetuate their criminal activity against our society”. When assets are forfeited, title of the assets passes to the government and can then be transferred to fraud victims. Although compensating victims is not the overall goal of asset forfeiture, it is important and an often used mechanism to compensate victims. In doing so, the government must follow certain regulations and procedures, namely, remission and restoration.

Remission

After assets have been judicially forfeited, the authority to distribute the assets to victims rests with the US Attorney General. The US Attorney’s office notifies the victim that they can file a petition for remission either by mail or, for unknown victims, through publication.

According to 28 C.F.R. Part 9, a victim is “a person who has incurred a pecuniary loss as a direct result of the commission of the offense underlying a forfeiture”. A victim can be “an individual, partnership, corporation, joint business enterprise, estate, or other legal entity capable of owning property”.

To be considered for remission, a victim must show:

• a pecuniary loss of a specific amount has been directly caused by a criminal offense;
• the pecuniary loss is the direct result of the illegal acts;
• the victim did not knowingly contribute to, participate in, benefit from, or act in a wilfully blind manner towards the commission of the offense;
• the victim has not in fact already been compensated for the wrongful loss; and
• the victim does not have recourse reasonably available to other assets from which to obtain compensation for the wrongful loss of the property (28 C.F.R. Part 9.8(a).

The pecuniary loss is determined by the “fair value” of the property (28. C.F.R. Part 9.8(b)). Fair value is not defined in the regulation.

Restoration

To accelerate the return of property to victims, the Criminal Division created alternative procedures to return forfeited funds to victims. The procedures apply where: (i) both restitution to compensate victims and a related forfeiture have been ordered; (ii) the victims and amounts in the restitution order virtually conform to the amounts that would have been paid in the remission process; and (ii) other property is not available to satisfy the restitution order. Restoration allows some victims of fraud to receive fair compensation in a more efficient manner.

Recent Cases in Asset Forfeiture

Two recent cases in which the government has forfeited assets of defendants are U.S. v. Dreier and U.S. v. McDowall. In U.S. v. Dreier, Drier sold $700 million worth of fictitious promissory notes. Dreier directed victims to wire funds into his own account, which he then used for his own benefit and to keep the fraud ongoing. The court ordered $746 million forfeited and sentenced Dreier to 20 years in prison. In Dreier, the court-appointed receiver is trying to recover Mr. Dreier’s assets on behalf of his victims. As of July 2009, the receiver had seized a $39 million art collection, an $18 million yacht and several expensive cars.

In U.S. v. McDowall, McDowall led a mortgage fraud scheme that defrauded homeowners out of their properties or equity in their property. Many of the victims of the crime were elderly and immigrants. The court ordered $2.5 million forfeited and sentenced him to 10 years in prison.

In both cases, based on the forfeiture orders, victims of fraud who are known to the government can expect to be compensated for a portion of their losses.

Conclusion

Prosecutors and regulators can assist the victims of fraud with compensation for a portion of their losses. As demonstrated by the SIPC trustee in Madoff and remission and restoration procedures, to maximise compensation through the government, fraud victims must be proactive with the government and determine what types of procedures the government is using to seize the perpetrators assets to maximise the compensation available