Search for:

On November 1st, the U.S. Supreme Court agreed to hear arguments on whether the SEC has the authority to obtain disgorgement of “ill-gotten gains” in federal court for securities law violations.  The SEC historically has been successful in obtaining monetary relief from defendants through disgorgement, which the SEC has asserted is within the courts’ equitable powers, in addition to its statutory authority to seek civil penalties. If the Court rules that the SEC lacks the authority to obtain disgorgement in federal district court actions, it could disrupt and create significant uncertainties for the SEC’s enforcement program.

A Potential Blow Against the SEC Post-Kokesh

In SEC v. Liu, the Ninth Circuit affirmed the lower court’s decision to grant summary judgment in the SEC’s favor imposing disgorgement of approximately USD 27 million in addition to an USD 8 million civil penalty against the defendants.[1] The defendants appealed, arguing that the SEC does not have the authority to seek disgorgement for violations of the federal securities laws.  The Supreme Court granted the writ of certiorari by petitioners Liu and others.

The latest challenge follows a defeat the SEC suffered before the U.S. Supreme Court in 2017 in Kokesh v. SEC.[2]  By statute, the SEC may obtain only injunctive relief, equitable relief, or civil monetary penalties in enforcement actions it files in federal district courts.[3]  For decades, the SEC has sought disgorgement in federal court as a form of “equitable relief.” Defendants argue, however, that because equitable relief is meant to be remedial rather than punitive, disgorgement is not an equitable remedy. This argument stems in part from the Supreme Court’s decision in Kokesh, in which the Court held that SEC disgorgement operates as a “penalty” and thus is subject to the five-year statute of limitations that governs such penalties.  The Court in Kokesh pointedly noted that it was not taking a position on “whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context.”[4]  The Court’s decision to hear argument on the SEC’s authority to seek and obtain disgorgement has thus been widely anticipated.

Some recent decisions by this Supreme Court have hewed very closely to statutory language, which would appear to bode ill for the SEC’s ability to obtain disgorgement in federal court.[5]

Uncertainties for SEC Enforcement

If the Court decides the SEC does not have the power to seek disgorgement in federal district court actions, it could create significant uncertainties for the SEC enforcement staff regarding federal district court actions.

For instance, if the Court rules against the SEC, what happens to prior disgorgement awards? Since Kokesh, several defendants have attempted to modify prior disgorgement awards arguing that disgorgement for conduct falling outside the statute of limitations is no longer allowable under Kokesh.  In these instances, defendants were not successful.  For example, in SEC v. Radius Capital Corp., the defendant moved to amend the pre-Kokesh disgorgement award under Rule 60(b) for relief from a final judgment order.[6] The court denied the motion, reasoning “[a] change in the decisional law is not an ‘extraordinary circumstance’ sufficient to invoke Rule 60(b)(6)”[7]  

A ruling against the SEC may further complicate its decision whether to bring an enforcement action in federal district court or in its own administrative forum.  Unlike the purported equitable basis for disgorgement in federal district court actions, the SEC has explicit statutory authority for disgorgement, along with other forms of relief, in its own administrative proceedings.[8]  Such proceedings are presided over by administrative law judges (ALJs) and subject to de novo review by the SEC’s commissioners.  But uncertainties and risks from the Supreme Court’s review of its disgorgement power in federal courts may affect the SEC’s choice of forum for its enforcement actions while this matter is under review.


 

[1] SEC v. Liu, 754 F. App’x 505 (9th Cir. 2018).
[2] 137 S. Ct. 1635 (2017).
[3] See 15 U.S.C. §§ 77t(b), (d), 78u(d)(1), (3), (5).
[4] Kokesh, 137 S. Ct. at 1642 n.3.
[5] See Lorenzo v. SEC, 139 S. Ct. 1094 (2019); Dig. Realty Tr., Inc. v. Somers, 138 S. Ct. 767 (2018).
[6] No. 2:11-cv-116-FtM-29MRM, 2017 U.S. Dist. LEXIS 127557  (M.D. Fla. Aug. 11, 2017).
[7] Id. at *8 (citations omitted); see also SEC v. Amerindo Inv. Advisors, Inc., No. 05-cv-5231 (RJS), 2017 U.S. Dist. LEXIS 110407, at *29 (S.D.N.Y. July 14, 2017).
[8] See 15 U.S.C. § 78u-2(e) (allowing the SEC to “enter an order requiring accounting and disgorgement” in an administrative proceeding).

***

Baker McKenzie’s Financial Regulation and Enforcement Practice provides our clients with a full range of regulatory advice and enforcement counseling. This integrated approach helps clients navigate the challenges presented by developing new products and offering financial services in a rapidly changing regulatory environment, while simultaneously considering how to assess and minimize potential enforcement exposure. Enforcement investigations and regulatory examinations are similarly addressed, not only with considerable enforcement experience, but also by fully leveraging the enormous value added by regulatory expertise.

 

Author

Jennifer L. Klass serves as the Co-chair of Baker McKenzie's Financial Regulation and Enforcement Practice in North America. Jen is an experienced investment management lawyer with particular focus on investment adviser regulation and the convergence of investment advisory and brokerage services. She regularly represents clients before the US Securities and Exchange Commission (SEC), both in seeking interpretative guidance and in managing examination and enforcement matters. Jen is a leading practitioner in digital investment advice and the use of FinTech in the asset management industry. Jen provides practical advice that is informed by her experience as Vice President and Associate Counsel at Goldman, Sachs & Co., where she represented the asset management and private wealth management businesses.

Author

Amy serves as the Co-chair of Baker McKenzie’s North American Financial Regulation and Enforcement Practice, which provides our clients with a full range of regulatory advice and enforcement counseling. Previously, Amy has served as chief litigation counsel at the US Securities and Exchange Commission's (SEC) Philadelphia regional office and managed a team of lawyers overseeing a wide variety of enforcement matters and investigations.

Author

Peter K.M. Chan is a member of Baker McKenzie’s North American Financial Regulation and Enforcement Practice, which provides our clients with a full range of regulatory advice and enforcement counseling. Peter brings two decades of experience at the US Securities and Exchange Commission (SEC) to his litigation and counseling work. His tenure at the SEC, as well as a stint as Special Assistant US Attorney in the Northern District of Illinois, have given Peter experience with civil and criminal matters. At the SEC, Peter served as assistant regional director in the Chicago regional office, where he led investigations and litigations of high-profile enforcement cases. In the course of his SEC career, he handled corporate issuer disclosure and reporting violations, financial fraud, auditor independence violations, insider trading, broker-dealer misconduct and failure to supervise cases, hedge fund and investment company fraud, and Dodd-Frank and Sarbanes-Oxley violations. As the head of the Municipal Securities and Public Pensions Unit at the SEC's Chicago office, he oversaw cases involving municipalities and public pensions throughout the Midwest, including disclosure failures by states, cities, and underwriters in municipal bond offerings; pay-to-play and public corruption; and securities fraud victimizing municipalities and public pensions. Peter also served in national leadership roles within the SEC's Enforcement Division. Peter acted as national leader of the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative. He also served as co-chair of the Priorities and Resources Subcommittee of the Division of Enforcement Advisory Committee and was one of the original architects of the SEC Financial Reporting and Audit Task Force. Peter's experience in criminal securities fraud cases includes serving as Special Assistant US Attorney in the Northern District of Illinois in a criminal investigation into market abuse by a Chicago broker-dealer, resulting in guilty pleas by several senior executives at the firm. In 2014, Peter received the SEC's prestigious Paul R. Carey Award for his [e]xceptional personal commitment and effectiveness as a member of the Division of Enforcement.

Author

A. Valerie Mirko is a partner in Baker McKenzie’s Financial Regulation and Enforcement Practice Group in North America. Valerie has substantial experience in federal and state securities laws and regulations affecting the financial services industry, with a focus on the investment adviser and brokerage industries. Valerie has a background in both regulatory advice and enforcement counseling. Immediately prior to joining the Firm, Valerie was General Counsel of the North American Securities Administrators Association (NASAA). As General Counsel, Valerie advised NASAA’s Board of Directors on developments in the federal securities laws and their impact on state securities regulations. Valerie provided advice on, among other areas, the SEC Regulation Best Interest rule set, fiduciary duty/standards of care, preemption, retail enforcement issues, investment adviser oversight, and data privacy. She also supervised all of NASAA's securities-related legal work and was a resource on multistate enforcement investigations and settlements. Valerie also provided governance support on key NASAA Regtech projects and regulatory coordination initiatives between state and federal regulators. Valerie was a frequent speaker at regulator-only roundtables and training events. Earlier in her career, Valerie advised broker-dealers and investment advisers on regulatory matters and enforcement investigations as an associate at a Washington law firm and held legal and compliance roles at Oppenheimer & Co., Inc., and Merrill Lynch (now BofA Securities). Valerie is currently a member of the adjunct faculty at the George Washington University Law School and a subcommittee chair within the DC Bar Corporation, Finance, and Securities Law Community.

Author

Jerome Tomas is Chair of the Firm's SEC and Financial Institutions Enforcement Group and has been recognized by Chambers for White Collar Crime & Government Investigations. He represents multinational companies faced with government investigations and conducts internal investigations to assess and remediate legal and compliance concerns in domestic and global operations. With his experience as a former member of the SEC Division of Enforcement’s Cyberforce, the agency’s internet and cyber fraud unit, Jerome regularly advises companies involved in data security breaches and incident response. Jerome now leads teams of lawyers to address government law enforcement perspectives and where necessary, meet and refute government legal theories of corporate and individual liability head-on, while also being pragmatic and business-oriented for management and boards to compete internationally.