Kokesh Redux: SCOTUS to Hear Challenge to SEC Disgorgement Authority
The SCOTUS’s 2017 Kokesh decision limited the SEC’s ability to use one of its favorite enforcement remedies when the Court unanimously held that SEC disgorgement claims were subject to a 5-year statute of limitations. Now, a Reuters article says that the SCOTUS has agreed to hear a new case that could remove disgorgement entirely from the SEC’s arsenal. Here’s an excerpt:
The U.S. Supreme Court on Friday agreed to hear a challenge to the ability of the Securities and Exchange Commission to recover ill-gotten profits obtained through misconduct in a case from California that could weaken the agency’s enforcement power.
The nine justices agreed to hear an appeal by California couple Charles Liu and Xin Wang contesting a 2016 civil action brought against them by the SEC. The SEC won a court ruling in 2017 requiring Liu and Wang to disgorge almost $27 million, the same amount they raised from foreign investors to build a never-completed cancer treatment center.
Part of the SEC’s civil enforcement arsenal, disgorgement requires defendants to hand over to the U.S. government money obtained from a fraudulent scheme. The SEC has said it generally passes on disgorged funds to the original investors although it was not required to do so in this particular instance. In fiscal year 2018, the agency returned $794 million to harmed investors.
Whether the SEC actually has the ability to seek disgorgement is an issue that the Kokesh Court specifically raised in footnote 3 of Justice Sotomayor’s opinion:
Nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context. The sole question presented in this case is whether disgorgement, as applied in SEC enforcement actions, is subject to § 2462’s limitations period.
It looks like the SCOTUS’s invitation to litigate this issue has been accepted. Here’s the cert petition & the Court’s order granting it. A decision in the case is expected by June 2020.
-John Jenkins, TheCorporateCounsel.net November 4, 2019
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