Friday, June 30, 2017

Supreme Court Limits SEC's Disgorgement Powers

In a highly anticipated ruling, the U.S. Supreme Court limited the power of the Securities and Exchange  Commission (SEC) to recover profits garnered from illegal conduct. The SEC has long relied on disgorgement in cases involving broker misconduct.

In a unanimous decision, the high court ruled that the SEC must abide by a five-year statute of limitations in seeking disgorgement in securities fraud cases. This ruling is significant in light of the fact that the SEC has seized nearly $3 billion in disgorgements of ill-gotten gains in recent years.

At issue in this cases was whether disgorgements are a penalty that are subject to the statute of limitations. The SEC argued that the statute of limitations does not apply because disgorgement is a remedy for unjust enrichment rather than a penalty. During oral arguments, the justices appeared to be unconvinced by the SEC's position, and many observers believed the Supreme Could would rule against the SEC.

The case was brought by a New Mexico businessman who was convicted of securities fraud in 2015, a scheme in which he misappropriated investor's money between 1995 to 2009 to furnish a lavish lifestyle. A judge ordered him to pay a $2.4 million civil penalty, and the SEC also ordered him to pay $34.9 million is disgorgement, the amount of ill gotten gains dating back to the start of the scheme. However, if the five-year statute of limitations applied, the disgorgement would have been about $ 5 million.

Writing for the  court, Justice Sotomayor said that “SEC disgorgement . . . bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate.”

She also noted that that the money received often goes to the government rather than victims of the fraud. “The 5-year statute of limitations . . . therefore applies when the SEC seeks disgorgement," wrote Sotomayor.  

The Takeaway

This ruling will have far reaching implications for securities fraud cases going forward, as well as for prior cases in which the SEC had ordered disgorgement beyond the 5-year statute of limitation.  Critics of the decision believe disgorgement is a necessary tool to deter illegal conduct, and that this ruling will allow securities fraudsters to evade punishment.

However, others argue that it is not the role of the Supreme Court to write the laws, and that Congress would need to craft legislation to establish broader time limits for disgorgement. In the meantime, resolving disputes between brokers and their customers requires the advice and counsel of experienced securities law attorneys.

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