Supreme Court To Hear Case On Validity Of SEC Disgorgement

Author:Ms Eva Carman, Daniel V. McCaughey, Matthew L. McGinnis, R. Daniel O'Connor, Daniel V. Ward and Anne Hancock
Profession:Ropes & Gray LLP
 
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Introduction

In June 2017, the Supreme Court issued its landmark Kokesh decision, which unanimously held that the remedy of "disgorgement" - regularly imposed by the SEC in securities enforcement actions - operates as a "penalty," rendering claims for disgorgement subject to the five-year statute of limitations set forth in § 2462.1 On Friday, November 1, 2019, the U.S. Supreme Court agreed to consider whether the SEC has the authority to seek disgorgement at all - a question that it raised, but explicitly declined to address in Kokesh.2

The remedy of disgorgement operates as a "form of 'restitution measured by the defendant's wrongful gain.'"3 No statute expressly authorizes the SEC to obtain the remedy of disgorgement in enforcement matters. Instead, as the Court explained in Kokesh, the SEC persuaded federal courts to order defendants to pay disgorgement beginning in the 1970s, at a time when the "only statutory remedy available to the SEC in an enforcement action was an injunction barring future violations of securities laws," and the Commission had no express authority to obtain any type of monetary relief.4 At the time of this development, disgorgement was viewed as an exercise of the federal courts' "inherent power to grant relief ancillary to an injunction."5

After Congress expressly granted the SEC the ability to obtain civil monetary penalties in 1990, the SEC has continued to rely on disgorgement as a significant part of its arsenal to deter violations of the securities laws. The Kokesh decision reduced the potency of the remedy to some degree by limiting its application to monetary amounts obtained by a defendant within five years of the SEC's claim being filed. But even so, in 2018 alone, the SEC obtained orders imposing $2.51 billion of disgorgement, in comparison to $1.44 billion in civil monetary penalties.6

The question of whether or not the SEC has authority to seek disgorgement in the first place has wide-ranging implications not only for the SEC, but also for other regulatory agencies that routinely seek disgorgement such as the CFTC, FTC, FDA, and CFPB, among others.

The Supreme Court's Landmark Kokesh Decision & Footnote 3

In June 2017, the Supreme Court addressed the issue of whether the five-year statute of limitations set forth in § 2462, which applies to any "action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise," also applies when the SEC seeks disgorgement.7 Prior to that the point, the SEC had routinely taken the position that as part of its inherent equitable enforcement powers, disgorgement was not subject to the five-year statute of limitations applicable to civil penalties. The Court disagreed and unanimously held that SEC disgorgement operates as a "penalty" and therefore that any disgorgement claims must be commenced within five years.

The Court reasoned that disgorgement in an SEC enforcement matter is a penalty...

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