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New Restriction’s to the SEC’s Power

Finance and Securities

“Profit” by 401(k) 2012, licensed by CC Attribution Share Alike 2.0 Generic.

On Tuesday, April 18th, the Supreme Court heard argument in Kokesh v. SEC regarding whether the Securities and Exchange Commission (SEC) should be permitted to order defendants to return illegal and fraudulent profits that are older than five years. This remedy is a “disgorgement”. Kokesh v. SEC concerns investment adviser Charles Kokesh who misappropriated investors’ assets. The SEC brought an action against Kokesh in 2009, where he was ordered to pay $2.4 million in penalties and $34.9 million in disgorgement of illicit profits.

Both conservative and liberal justices examined whether the SEC’s remedy of disgorgement should be restricted by a statute of limitations. In 2013, the Supreme Court held in Gabelli et al. v. SEC that penalties, forfeitures and punitive remedies in civil proceedings brought by the SEC are restricted to a five year statute of limitations from the time the fraud occurs. Chief Justice Roberts explained that without a statute of limitations, “[i]t would leave defendants exposed to Government enforcement action not only for five years after their misdeeds, but for an additional uncertain period into the future. And repose would hinge on speculation … Deciding when the Government knew or reasonably should have known of a fraud would also present particular challenges for the courts…” (at 301).

In Kokesh, the conduct making the defendant subject to the penalties falls within the five year timeframe, however, the disgorgement mostly falls outside of this period. The defendant’s attorney argues that disgorgement should be considered as punitive forfeiture and therefore fall within the ambit of the statute of limitations. If this is the case, Kokesh would only owe $5 million instead of $34.9 million. The Justice Department stresses that disgorgement is necessary and intended to put the defendants back in the position before they conducted the illicit activity, regardless of the timeframe. Elaine Goldenberg for the Justice Department argues that “[i]t just remedies unjust enrichment.” However, the Justices are skeptical whether this should have no boundaries.

The new Supreme Court Justice Neil Gorsuch argued that the Supreme Court is “just making it up” due to a lack of statute and direction from Congress regarding disgorgement. Congress has not addressed what remedies there should be and who the remedied money should go to, whether that is the government or victims. Gorsuch continued by arguing that in criminal proceedings this would be regarded as a penalty and therefore would fall within the ambit of the statute of limitations. If the Court does not rule in favor of the SEC it will prevent the Commission from collecting money going all the way back to the time the fraud occurred. This would be a significant monetary and power loss for the SEC, who received over $4 billion from disgorgement actions in 2016. This ruling can limit the SEC’s power and authority by overruling their methods of punishing defendants, essentially restricting how the agency monitors and regulates fraudulent activity.

Furthermore, if the Supreme Court’s decision is retroactive and in favor of Kokesh, it will open the floodgates of litigation proceedings brought by defendants who already paid these fees. The ruling is scheduled for June.

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