Receivership is a process that occurs when the Securities and Exchange Commission (SEC), the Federal Trade Commission (FTC), or the Consumer Financial Protection Bureau (CFPB) suspects a company or entity of having committed fraud or other federal securities law misconduct. In these situations, a receivership claim is initiated in federal court, where a federal court judge appoints an independent third-party receiver to assist in handling the company’s assets regarding the allegations and ensure that assets are legally managed, preserved, liquidated, and distributed appropriately. An essential player in a receivership claim is a receiver that serves as court-appointed custodians of the defendant company’s assets. These independent receivers play a significant role in ensuring that assets are protected, evaluated, liquidated, and distributed appropriately.

What is a Court-Appointed Receiver?

A receiver is a neutral third-party custodian appointed by the court to act as an officer to protect the assets controlled by the entity being sued. Generally, these receivers are established through the recommendation of the SEC.

Who Designates the Receiver in a Receivership Claim?

A receiver is generally designated by the federal district court judge handling a receivership case. As mentioned above, receivers are typically assigned by the court through the active recommendation by the SEC. Typically, the SEC provides the court with a list of appropriate candidates to pick for a case.

However, it is essential to note that even though receivers are recommended by the SEC, these receivers are not subject to the SEC’s powers, and they are not to be considered employees of the SEC. Instead, receivers are considered independent custodians that directly report to the federal district court judge handling the receivership case.

What are the Scope and Powers of the Receiver’s Authority?

A receiver’s scope of authority is pretty broad when it pertains to the company’s asset as long as it is within their fiduciary duties. Such fiduciary duty mandates that receivers must act to benefit the stakeholders of the assets and the court. These general power given to court-appointed receivers even includes the ability to:

• File a lawsuit on behalf of the entity placed into a receivership;
• Take legal control of and protect assets conferred to them;
• Gather, manage and liquidate receivership assets on behalf of potential creditors and harmed investors;
• Distributing assets to defrauded entities, including, but not limited to, investors, claimants, or creditors that the court approves;
• Periodically report to the court any updates or situations regarding the property assets assigned to them.

How Are Company Assets Handled in an SEC Receivership?

Receivers appointed by the court is empowered to act as the guardian of the receivership estate. Thus, their responsibilities include that the receiver will have to determine and set a plan on how to distribute the company’s assets by creating a distribution plan. A distribution plan generally outlines how payments or distributions are made to the injured investors. This plan is then submitted to the court, which will consider the proposal drafted by the distribution plan. The court will typically approve the recommendation if they believe it is fair and reasonable.

Although the court favors a proportionate approach based on the investor’s net losses in distributing the assets, the court can choose whatever allocation plan they determine as appropriate based on the circumstances and facts presented to them in the case.

What Should Claimants to a Receivership Asset Expect or Do to Ensure They Are Part of the Asset Distribution?

Potential claimants to a receivership asset are generally notified by the court-appointed receiver handling the property to be distributed via mail, email, or a receivership website. These modes of notification include all essential details regarding the property distribution that the claimant may be entitled to, including, but not limited to, claim forms, deadlines, validation requirements, and other requirements. It is vital for a potential claimant to read and understand all notifications sent by the receiver and to file the appropriate forms or claims by the deadline to be eligible for a valid claim against a receivership asset. It is important to remember that the receiver would very likely deny the claim if the form had not been filed by the claim deadline.