“Kokesh v. SEC”: Its Wide-Ranging (and Mostly Good) Implications for Disgorgement Actions

MorrisGuest Commentary

By Andrew J. Morris, a Partner with Morvillo LLP. Mr. Morris authored a March 10, 2017 WLF Legal BackgrounderIs the Clock Running out on SEC’s Unchecked Pursuit of Disgorgement Penalties?

In Kokesh v. Securities and Exchange Commission, the US Supreme Court ruled that SEC actions for disgorgement are governed by the five-year statute of limitations for penalties. This decision is a real blow to the SEC: It ends the practice of using disgorgement actions to obtain massive sanctions for conduct that took place many years in the past, outside the limitations period for penalties and forfeitures. The decision also invites defendants to make further challenges to SEC enforcement actions by litigating several related issues.

Implications for Enforcement Proceedings

The Court’s opinion, written by Justice Sotomayor, is summarized in a WLF Legal Pulse post authored last week by UCLA School of Law Professor Stephen Bainbridge. The gist of the decision is that disgorgement is a form of penalty because it involves a defendant who has violated a public law and must pay money to the United States Treasury; this contrasts with non-penalty cases, where the defendant has injured a particular victim and must pay compensation to that victim. And because disgorgement is a penalty, the Supreme Court held, disgorgement actions are covered by 28 U.S.C. § 2462, the five-year statute of limitations for penalties. Continue reading

Supreme Court Observations: Kokesh v. Securities & Exchange Commission

Featured Expert Contributor – Corporate Governance/Securities Law

bainbridgeStephen M. Bainbridge, William D. Warren Distinguished Professor of Law, UCLA School of Law.

The Securities and Exchange Commission (SEC) can seek a wide range of sanctions against those who violate the federal securities laws, including various monetary penalties. Most of these causes of action are subject to the 5 year statutes of limitations under 28 U.S.C. § 2462. Section 2462 applies to any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture.” In Gabelli v. SEC, 568 U. S. 442 (2013), the US Supreme Court held that suits in which SEC seeks monetary civil penalties are subject to § 2462. Until recently, however, SEC claimed—and some lower courts agreed—that actions for disgorgement were not subject to § 2462 or, for that matter, any other statute of limitations.

In a unanimous June 5, 2017, opinion by Justice Sotomayor, however, the Supreme Court held that disgorgement imposed in SEC actions constitutes a penalty and, accordingly, that such suits are subject to the § 2462 limitations period. Kokesh v. SEC, 581 U.S. ___ (2017). [Editor’s Note: Washington Legal Foundation filed an amicus brief in the Court in support of the Petitioner]. Continue reading

One Loss before ALJ Doesn’t Unmake SEC’s Home-Court Advantage

Corporate Governance/Securities Law

bainbridgeStephen M. Bainbridge, William D. Warren Distinguished Professor of Law, UCLA School of Law.

Las Vegas odds makers say that having the home field is worth about three points to the average National Football League team, which is helpful but not a guarantee of victory. For some teams, however, the home-field advantage gives them an almost insurmountable edge. Between 2012 and 2015, for example, the Seattle Seahawks won 27 out of 32 home games and all four of their home playoff games. During that period, no other NFL team had a bigger home-field advantage.

Despite the huge advantage playing at home gave the Seahawks, it didn’t make them unbeatable. After all, they did lose five out of those 36 games. All of which is why the press hullaballoo over a Securities and Exchange Commission administrative law judge’s (ALJ) decision in In re Hill1 is much overblown. Continue reading

Outcome of Recently Argued “Kokesh” SCOTUS Case Will Impact SEC’s Use of Potent Disgorgement Authority

Featured Expert Contributor — Corporate Governance/Securities Law

bainbridgeStephen M. Bainbridge, William D. Warren Distinguished Professor of Law, UCLA School of Law.

Disgorgement of ill-gotten gains long has been a basic tool in the Securities and Exchange Commission’s (SEC) penalty toolkit, despite a paucity of statutory authorization.1 The equitable nature of disgorgement has meant courts have had to resolve many questions without the benefit of statutory guidance. In Kokesh v. SEC,2 the US Supreme Court took up the seemingly technical—but surprisingly important—question of what statute of limitations applies to SEC disgorgement actions.

Appellant Charles Kokesh owned and controlled a pair of investment adviser firms that, in turn, managed four business development corporations (BDCs). Both the investment advisers and the BDCs were registered with SEC. SEC alleged that Kokesh misappropriated almost $35  million from the BDCs for the benefit of himself and the investment adviser firms. After a civil trial, a jury agreed that Kokesh had fraudulently misappropriated the funds. The trial judge ordered Kokesh to disgorge $34.9 million, which it found “reasonably approximates the ill-gotten gains causally connected to Defendant’s violations.” Continue reading

Change Coming for SEC’s Controversial Conflict Minerals Rule

Featured Expert Contributor — Corporate Governance/Securities Law

bainbridgeStephen M. Bainbridge, William D. Warren Distinguished Professor of Law, UCLA School of Law.

Section 1502 of the 2010 Dodd-Frank Act required the Securities and Exchange Commission (SEC) to develop disclosure rules requiring public companies to disclose whether their products contained “conflict minerals.” The minerals in question included cassiterite, columbite-tantalite, gold, wolframite, or their derivatives, all of which are used in a variety of common products, including computers, smart phones, and other everyday technology. In order to be deemed conflict minerals, they had to be sourced from the Democratic Republic of the Congo (DRC) or its adjoining countries. Continue reading

A Q&A with Federal Regulation Scholar Susan Dudley on Reconsidering Regulations

dudleysusan-2015_crop_webSusan E. Dudley is Director of the George Washington University Regulatory Studies Center, which she founded in 2009, and a distinguished professor of practice in the Trachtenberg School of Public Policy and Public Administration. From 2007 to 2009, she served as the Administrator of the Office of Information and Regulatory Affairs (OIRA) in the U.S. Office of Management and Budget.

WLF Legal Pulse: As promised, Congress and the Administration have quickly gotten to work reconsidering and removing a host of federal regulations while also setting the stage for a much different approach to regulation.  Let’s first talk about what Congress is doing.

Professor Dudley: Under the Congressional Review Act of 1996 (CRA), Congress has 60 legislative days after a regulation is published to vote to disapprove it.  The procedures for disapproval are streamlined (including requiring a simple majority in the Senate) and if a rule is disapproved, the agency cannot issue something substantially similar. Continue reading

US Supreme Court’s ‘Salman v. US’ Decision Answers One Insider-Trading Question, Leaves Others Unresolved

bainbridgeFeatured Expert Contributor — Corporate Governance/Securities Law

Stephen M. Bainbridge, William D. Warren Distinguished Professor of Law, UCLA School of Law

In Salman v. United States, the US Supreme Court returned to the problem of insider trading for the first time in almost two decades. The Court reaffirmed a rule from prior insider-trade caselaw that a gift of information between friends and family constitutes the requisite benefit. Justice Alito’s very brief opinion for a unanimous Court, however, left a number of more difficult questions unresolved.

Bassam Salman was convicted of insider trading for using information he had received from a friend and relative by marriage named Michael Kara who, in turn, had received the information his brother Maher Kara, who was a Citigroup investment banker. Salman argued that liability in such cases should arise only when “there is proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,” citing the Second Circuit’s decision in United States v. Newman. Continue reading