Back in 2017, the Supreme Court in Kokesh v. Securities and Exchange Commission pointed out that the disgorgement claims made by the Securities and Exchange Commission are penalties and therefore subject to the five-year statute of limitations. The Kokesh decision left some question about whether the SEC could pursue disgorgement at all. The Supreme Court did not mean to kill it and earlier this year upheld the SEC’s disgorgement power in Liu v. Securities and Exchange Commission.
Congress managed to tuck some some goodies in the National Defense Authorization Act. Sure, that went through gyrations after President Trump vetoed it because it didn’t have some things he wanted in it. On Jan. 1, Congress overrode President Trump’s veto of the defense spending bill.
Section 6501 of the NDAA specifically authorizes disgorgement and allows for a 10 year period in some instances.
SEC. 6501. INVESTIGATIONS AND PROSECUTION OF OFFENSES FOR VIOLATIONS OF THE SECURITIES LAWS.
(a) In General.–Section 21(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78u(d)) is amended–
…
(3) by adding at the end the following:(7) Disgorgement.–In any action or proceeding brought by the Commission under any provision of the securities laws, the Commission may seek, and any Federal court may order, disgorgement.
(8) Limitations periods.–
(A) Disgorgement.–The Commission may bring a claim for disgorgement under paragraph (7)–
(i) not later than 5 years after the latest date of the violation that gives rise to the action or proceeding in which the Commission seeks the claim occurs; or
(ii) not later than 10 years after the latest date of the violation that gives rise to the action or proceeding in which the Commission seeks the claim if the violation involves conduct that violates–
(I) section 10(b);
(II) section 17(a)(1) of the Securities Act of 1933 (15 U.S.C. 77q(a)(1));
(III) section 206(1) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-6(1)); or
(IV) any other provision of the securities laws for which scienter must be established.
The 10-year period is only for scienter-based claims. The SEC will have to allege intentional fraud.
What’s not clear in the statutory change is whether the Liu limiting principles will still apply to disgorgement claims. The Supreme Court laid out three limitation on disgorgement claims:
- Disgorged funds should be returned to the victims.
- Joint and several liability theory may not apply;
- Should be limited to “net” profits, allowing deduction of legitimate business expenses
I’ll leave figuring out whether they still apply to the legal scholars and, inevitably, future court cases.
In addition to the disgorgement extension, there is a new anti-money laundering scheme as part of the NDAA. More to come on that.
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