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Congress Leaves SEC Subject to Litigation Over Disgorgement
On Jan. 1, 2021, the U.S. Congress rang in the new year by passing the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021. Buried in the massive spending bill is §6501, a provision authorizing the U.S. Securities and Exchange Commission (SEC) to seek disgorgement of unjust enrichment within 10 years for certain securities law violations, and five years for others. Congress passed this legislation in apparent response to a pair of U.S. Supreme Court decisions that limited disgorgement in SEC enforcement actions to a five-year statute of limitations and required that the remedy not exceed a wrongdoer's net profits and be awarded for the benefit of victims. See, Kokesh v. Sec. & Exch. Comm'n, 137 S. Ct. 1635 (2017); Liu v. Sec. & Exch. Comm'n, 140 S. Ct. 1936, 1940 (2020).
While Congress may have intended for §6501 to free the SEC from the limits imposed by these two High Court decisions, a close reading of the statute's text reveals that the legislation fell short of its mark. As such, the new law leaves defendants in enforcement actions free to argue that Congress has not actually restored any of the agency's lost powers, subjecting the SEC to continued litigation over disgorgement absent an additional legislative fix.
Summary of Recent Precedent
In 2017, the Supreme Court decided whether disgorgement in SEC enforcement actions constituted a "civil fine, penalty, or forfeiture" subject to a five-year statute of limitations under 28 U.S.C. §2462, which governs the authority of federal courts to issue such relief in all actions, including those brought by the SEC. Kokesh, 137 S. Ct. 1635. A unanimous court held that the five-year statute of limitations applied, since the remedy in these cases bore all the hallmarks of a penalty: It is imposed as a consequence for violations of public laws committed against the United States rather than an aggrieved individual, and is intended to deter, not to compensate.
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