Previous posts here, here and here concerned the Supreme Court’s recent benchslap of the SEC in Kokesh v. SEC. As previously noted, the Court unanimously held that disgorgement “in the securities-enforcement context is a ‘penalty’ within the meaning of [28 U.S.C.] 2462 and so disgorgement actions must be commenced within five years of the date the claim accrues.”
The case should impact SEC FCPA enforcement against issuers, but that first requires issuers not to roll over and play dead when faced with SEC scrutiny by agreeing to waive or toll statute of limitations.
This post highlights what others are saying about Kokesh.
This Debevoise & Plimpton publication is interesting because the lead authors are recently departed SEC Chair Mary Jo White, recently departed SEC Enforcement Chief Andrew Ceresney, and recently departed SEC FCPA Unit Chief Kara Brockmeyer. During their tenure, the SEC elevated the use of disgorgement in FCPA enforcement actions.
The publication states:
“The impact of the decision may well be far-reaching. With this logic, the Court’s decision significantly limits the SEC’s ability to pursue a key remedy; impacts the SEC’s leverage in settlement discussions for certain types of cases, including FCPA cases; complicates decisions on whether to toll the statute of limitations; appears to raise significant questions as to whether other SEC sanctions, such as bars and even injunctions—previously thought to be “remedial” in nature— likewise represent penalties and are thus constrained by the five-year limitations period; and sets up a potential challenge more broadly to the SEC’s authority to obtain disgorgement in enforcement actions.”
Impact of the Kokesh Ruling
The Kokesh decision appears likely to have several important effects on SEC enforcement actions (and other related matters) going forward.
Reduced Leverage for the SEC in Settlement Negotiations
The decision significantly impacts the leverage available to the SEC in enforcement actions that span many years. Absent the spectre of litigation with monetary exposure extending beyond five years, the SEC will have reduced leverage in settlement negotiations. In the past, parties may have faced significant disgorgement liability for conduct more than five years old and agreed to a settlement for a narrower time frame to avoid that exposure. The application of the five-year time bar to disgorgement actions may have an especially meaningful effect on SEC actions involving violations of the Foreign Corrupt Practices Act (FCPA), as virtually every FCPA settlement in 2016 included disgorgement and prejudgment interest and the difficulties involved in those years-long investigations often result in proceedings concerning aged alleged violations. Other areas with long-running conduct, including some asset management cases like Kokesh, may also be impacted.
Fewer Investigations Involving Aged Conduct
This decision could impact the SEC’s decisions about where to devote resources. The SEC may be less likely to pursue investigations involving older conduct, and certainly will feel pressure to further improve the efficiency of its investigations. Relatedly, the SEC may be less flexible in negotiating lower levels of civil monetary penalties given the potential for reduced disgorgement.
Early Staff Requests for Tolling Agreements
In the conduct of their investigations, the SEC can be expected to focus on securing tolling agreements to extend the limitations period as much as possible during investigations and negotiations. Parties, however, may not feel the same pressure to sign tolling agreements now that disgorgement will be limited to the five-year period.
Cascaded Effects on Other Sanctions
Although the Kokesh decision provides much needed clarity on the question of whether the § 2462 time bar limits disgorgement in SEC enforcement actions, the decision raises critical questions around the impact of § 2462 on other SEC sanctions.
In particular, the SEC is permitted to seek various other remedies (beyond penalties and disgorgement) including injunctive relief and officer, director and industry or associational bars.7 The current state of the law on whether these remedies are subject to the limitations period in § 2462 is mixed. Although many courts have held that SEC enforcement actions seeking these equitable remedies are not subject to any limitations period, several courts have found these remedies to be punitive in nature and subject to the five-year limitations period. Now, however, armed with the Court’s analysis of what constitutes a “penalty,” defendants may find additional success in arguing that they are penalties subject to § 2462. Where, for example, a defendant in an SEC enforcement action is barred from serving as a director or officer of a public company as a result of a federal securities law violation, such a bar may arguably meet each of the Kokesh criteria because (i) SEC enforcement actions are brought in the public interest; (ii) the bar is intended to deter future violations; and (iii) the bar does not compensate victims. Ultimately, having lost both Gabelli and now Kokesh, it remains to be seen whether the SEC will continue to advance any theories that provide them with unlimited time to bring actions and obtain remedies.
Implications for Disgorgement in Ongoing Investigations
The application of the Kokesh decision will be especially problematic in disgorgement actions currently pending but not yet final and in ongoing investigations, as there may be significant confusion as courts and parties attempt to adjust to this limit on the SEC’s enforcement powers.
Impact on Reimbursement, Indemnification and Deductibility of Disgorgement Payments
The finding that disgorgement amounts to a penalty could have an impact on the availability of reimbursement, indemnification and deductibility of disgorgement payments. The SEC has for years precluded indemnification for penalties, and many insurance policies likewise preclude reimbursement of penalties. SEC settlements generally do not preclude defendants from seeking indemnification or reimbursement for disgorgement. There has also been an ongoing debate as to whether disgorgement is deductible, with a recent chief counsel advice memo from the IRS calling the deductibility of disgorgement as an expense into question. The Kokesh decision will lead to arguments that because disgorgement is a penalty, it is not subject to indemnification and is not deductible.
Additional Challenges Coming
The Kokesh decision will certainly give rise to challenges to the use of disgorgement in SEC enforcement proceedings; the Court explicitly did not decide “whether courts possess authority to order disgorgement in SEC enforcement proceedings or … whether courts have properly applied disgorgement principles in this context.” A court holding that the SEC lacks authority to obtain disgorgement at all could have an even more significant impact on SEC actions and remedies.”
This Pillsbury alert states:
“Among other substantive areas of enforcement, the recent Supreme Court’s decision is significant in the context of SEC enforcement actions alleging violations of the Foreign Corrupt Practices Act (FCPA). Indeed, in FCPA cases, the SEC has generally been able to extract large disgorgement amounts from companies and individuals that have settled FCPA allegations. For instance, in 2016 alone, at least four major companies each paid over $130 million in SEC disgorgement. Moreover, in numerous FCPA enforcement actions, the SEC has taken an expansive view of what constitutes the “ill-gotten gains” it seeks to disgorge, including, for example, severance payments to individuals alleged to have engaged in FCPA violations. Thus, in limiting the SEC’s ability to seek disgorgement to the limitations period, the Supreme Court has dealt a significant setback to the SEC in FCPA cases, where the SEC routinely resorts to the threat of disgorgement to persuade defendants into settling allegations of FCPA and other securities law violations.”
This BakerHostetler alert states:
“It is now settled law that disgorgement as well as civil monetary penalties are subject to the five-year statute of limitations under 28 U.S.C. § 2462. Now that the SEC has a fixed and clear five-year window to seek these remedies, corporations and individuals can expect both an increase in the speed of SEC investigations and greater uses of tolling agreements that specially carve out an extended period of time for the SEC to seek penalties. With this in mind, counsel and their clients should assess existing cases to determine if the SEC acted in time to preserve their ability to seek a penalty. Parties in the investigative stage should also be aggressively proactive in building and presenting their defense as early as possible in the enforcement process to avoid a potential rush by the SEC to file an action.”
This King & Spalding alert states:
“Most commentators have focused on the 5-year limitations period, which certainly carries important ramifications for the SEC. But as we describe here, the Supreme Court’s ruling that “SEC disgorgement constitutes a penalty” has more far-reaching ramifications.
Does the Five-Year Statute of Limitations Apply to Administrative Actions?
The Kokesh holding arose in the context of a federal court case, but the holding broadly applies to “SEC disgorgement.” Because the remedy has been consistently applied in both federal courts and the SEC’s own administrative courts, and because courts have held that § 2462 applies in SEC administrative proceedings, there is little doubt that the five year limitations period would apply equally in administrative proceedings as well as in federal court.
Will the Five-Year Statute of Limitations Hinder SEC Enforcement?
The five-year statute of limitations will not impact the SEC in most cases because the Commission typically acts, or preserves claims, within five years of the misconduct. Where misconduct does not come to light until well after it occurred, however, or where investigations are inherently time-consuming, the SEC’s hands may now be tied. These include matters involving the Foreign Corrupt Practices Act (“FCPA”), long-running Ponzi and pyramid schemes, accounting fraud, or investigations requiring the staff to gather information through time-consuming requests to foreign regulators. In those types of matters, we expect that the SEC enforcement staff may now move more aggressively, be less willing to agree to extensions for the production of documents and scheduling of testimony, and focus on fewer lines of inquiry in their investigations. We also expect that the staff will more routinely ask entities and individuals under investigation to enter tolling agreements, and will do so at an earlier stage of the investigation than has been customary in the past.
Will the SEC Tie Cooperation Credit to Prompt Action?
Since at least 2001, the SEC has expressly included promptness (in self-reporting, volunteering evidence, and responding to the SEC’s requests) as factors in evaluating the extent to which cooperation credit should be awarded in enforcement settlements. These promptness factors may become more prominent to the SEC’s assessment of cooperation in the wake of Kokesh, because this will maximize the potential remedies available to the SEC. For better or for worse, we expect that this dynamic will make the already-difficult analysis of whether or when to self-report potential violations and cooperate with the SEC even more complex. As one example, Kokesh adds to considerations companies must evaluate in deciding whether or when to self-report conduct taking place at or near the five-year statute of limitations period.
Can the SEC Continue to Obtain Disgorgement?
As it considers the impact of Kokesh, we expect that the SEC staff will be less aggressive in its disgorgement demands and more open to arguments limiting how disgorgement is calculated. At the same time, defendants and respondents who litigate will undoubtedly follow up on the Supreme Court’s apparent invitation, in a footnote, to challenge whether disgorgement is available at all as an SEC remedy in enforcement actions.
Footnote three states:
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.
At least two amicus briefs submitted in connection with the Kokesh case argued that, if disgorgement is not an equitable remedy, then the SEC has no statutory authority to seek disgorgement, at least in district court cases. Furthermore, four different justices asked questions or made comments about the issue during oral arguments, including Chief Justice Roberts’ remark that, “One reason we have this problem is that the SEC devised this remedy or relied on this remedy without any support from Congress. If Congress had provided, here’s a disgorgement remedy, you would expect them, as they typically do, to say, here’s a statute of limitations that goes with it.”
This Miller & Chevalier publication states:
“Leaving aside the potential for future narrowing of disgorgement as a remedy, the implications of Kokesh on SEC enforcement will be great. In the short term, the SEC will have to abandon any monetary remedies—no matter how characterized—in cases based on conduct occurring outside of the five-year limitations period if it did not already obtain a waiver. The decision will also force the SEC to resolve cases more quickly. In order to do so, the SEC will have to prioritize its caseload and exercise enforcement discretion more frequently than it has in the past. In addition, defendants will have more bargaining power in cases in which the SEC requests a waiver of the statute of limitations, allowing defendants to insist upon waivers that are narrowly tailored. This will come as a relief to companies that, in the past, were faced with the unenviable task of either agreeing to a broad waiver of the statute of limitations (going beyond the facts, countries, or timeframes under investigation) or to declining to execute a waiver and risking losing cooperation credit at the time of settlement. The decision may also impact companies’ appetite to voluntarily disclose potential wrongdoing. Though there will be many factors that will continue to encourage companies to make voluntary disclosures in FCPA cases, it is conceivable that Kokesh will tilt the scales against voluntary disclosure for companies discovering older conduct, as those companies may gamble on the possibility that the statute of limitations will pass before the SEC learns of the improper conduct. Finally, and perhaps most important, this decision will give companies much needed certainty as to the amount of time they can be liable for an FCPA violation.”
This Pepper Hamilton alert states:
“The Kokesh decision has the potential to significantly limit the financial sanctions at issue in SEC enforcement actions, especially in the context of the SEC’s enforcement of the Foreign Corrupt Practices Act (FCPA). Disgorgement in FCPA cases tends to be large, and the underlying conduct often spans a number of years — often beyond the five-year statute of limitations. In light of this decision, we may begin to see a decrease in the length of time that the SEC takes to resolve actions. Moreover, defendants negotiating settlements will now have more leverage and should keep the Court’s ruling in mind when considering requests for tolling agreements.”
This Akin Gump alert states:
“The Supreme Court’s Kokesh decision blunts one of the SEC’s most powerful enforcement weapons and promises to have several immediate effects. First, Kokesh is likely to push the Division of Enforcement to accelerate investigation and enforcement of cases, and more aggressively seek tolling agreements, in order to maximize the SEC’s disgorgement recovery. Second, the case explicitly opens the door for the defense bar to challenge whether courts possess authority to order disgorgement at all in SEC proceedings. Third, Kokesh may be a signal of future losses to come for the SEC and its enforcement programs. Another circuit split—this one relating to the constitutionality of the SEC’s administrative law judges—may find its way to the Supreme Court in the next term. See Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016) (disagreeing with D.C. Circuit and holding that SEC administrative law judge hirings unconstitutionally violate of Appointments Clause).”
This Morgan Lewis publication states:
“Kokesh will have direct and immediate implications for respondents and defendants negotiating settlements with or litigating against the SEC and the US Department of Justice (DOJ). In the past, both the SEC and DOJ have regularly sought disgorgement without limitation—extending back to the first date of any alleged misconduct and without any credit for taxes paid or for many other types of business expenses—rendering the disgorgement calculation disconnected from corporate defendants’ business realities.
Going forward, respondents and defendants are well-positioned to argue that any disgorgement sought must extend no further than five years from the date a claim accrued, assuming there are not facts strongly suggesting an ongoing scheme that can be tied to an earlier date. It remains to be seen whether respondents and defendants that have recently executed settlement agreements with the SEC will be successful in renegotiating those agreements on the grounds that the law has now been clarified. Further, the SEC and DOJ may look to accelerate existing investigations and cases based on potential amounts of disgorgement, timing, and fact patterns of misconduct.
The SEC can be expected to try to end-run the Kokesh decision by arguing fraudulent concealment of the conduct at issue or that the wrongdoing represented a “continuing course of conduct” that began before, but continued into, the five-year limitation period. Accordingly, as part of their defensive strategies, respondents and defendants should consider how best to demonstrate distinct patterns of conduct to counter the argument that individual acts or violations were part of an inter-related, ongoing scheme. In addition, for in-house compliance and legal teams, the Supreme Court’s ruling further incentivizes robust policing of internal policies and procedures so that any identified wrongdoing can be definitively halted.
The Supreme Court’s evident skepticism about the remedial nature of prior disgorgement awards that were “ordered without consideration of defendant’s expenses that reduced the amount of illegal profit” should encourage defendants to argue for greater offsets to SEC disgorgement demands. Tellingly, the Court noted that “[n]othing 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.”
In the face of Gabelli and Kokesh, the SEC must now conduct its investigations more quickly, file enforcement actions more readily, and characterize alleged fraudulent activity more frequently as part of a single continuing act, in order to minimize the effect of the statute of limitations. Whether Kokesh will lead to additional cutbacks in the scope of disgorgement remains to be seen in future cases.”
This Paul Weiss memo states:
“Gabelli and Kokesh have significantly reduced the SEC’s ability to bring stale claims in enforcement proceedings. In Gabelli, the Court decided that the five-year period of limitations set forth in § 2462 commences upon the occurrence of the wrongdoing, and not upon the SEC’s discovery of the wrongdoing. Gabelli thus declined to allow a potentially indefinite period of time to elapse before the five-year period commenced. Kokesh, by holding that the five-year period applies to claims for disgorgement, provides defendants with additional certainty respecting the period within which the SEC must bring claims seeking monetary penalties. Kokesh also prevents the SEC from trying to evade Gabelli by bringing claims for disgorgement in circumstances where the SEC might previously have sought a monetary penalty.
SEC enforcement proceedings frequently involve wrongdoing that is alleged to occur over a significant period of time. In proceedings that the SEC commences within the five-year period specified in § 2462, Kokesh will prevent the SEC from seeking monetary penalties, including disgorgement, attributable to wrongdoing that occurred more than five years before commencement of the proceeding.
In cases with a substantial potential for disgorgement attributable to older conduct, Kokesh may affect a defendant’s decision to enter into a tolling agreement with the Government to extend the statute of limitations while an investigation is pending. Several recent settlements of SEC enforcement actions brought under the Foreign Corrupt Practices Act (“FCPA”) and other statutes have involved conduct spanning many years. For example, in a recent FCPA settlement with General Cable, the SEC required the company to pay more than $55 million in disgorgement and interest in connection with conduct occurring over 13 years. In the future, defendants are likely to consider how to craft such agreements to exclude the potential for disgorgement related to conduct that is more than five years old, and the SEC may consider asking for such a tolling agreement earlier in the investigation to preserve this powerful remedy.
Kokesh does not address the SEC’s consistent position that no period of limitations is applicable to an enforcement proceeding seeking only injunctive relief. Kokesh therefore does not provide any assurance that the SEC will not commence an enforcement proceeding more than five years after the alleged wrongdoing; it limits only the available relief. In addition, the SEC has taken the position that “§ 2462 does not apply to FINRA disciplinary proceedings,” and that “the disciplinary authority of self-regulatory organizations (‘SROs’) such as [FINRA] is not subject to any statute of limitations.”
In a footnote, the Kokesh opinion cautioned that “[n]othing 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.”16 That footnote preserves arguments that the SEC lacks authority to seek disgorgement in civil actions, although the SEC has express authority to seek disgorgement in administrative proceedings.17 The footnote also preserves challenges to the SEC’s more far-reaching interpretations of disgorgement, such as the view that in insider trading cases, the SEC may obtain “disgorgement” from a tipper of unlawful profits that were actually received only by the tippee. Similarly, in a case where an individual fund manager was found liable for trading based on inside information on behalf of the fund he managed, the Second Circuit held that a district court properly ordered “disgorgement” from the fund manager of the full amount of illegal profits received by the fund.”
This Skadden publication states:
Potential implications of the Kokesh decision include the following:
While many SEC enforcement actions are brought within the five-year statute of limitations prescribed by Section 2462, some are not. The Kokesh ruling will limit the Commission’s ability to pursue full disgorgement as a remedy where the alleged conduct is long-running or well-concealed.
In recent years, the SEC Division of Enforcement staff has become more aggressive in securing tolling agreements in cases that could potentially implicate statute of limitations concerns. Companies and individuals involved in SEC investigations should expect the staff to request tolling agreements in any investigation that is expected to continue for a significant amount of time.
The SEC has utilized disgorgement as a primary remedial measure in Foreign Corrupt Practices Act enforcement settlements. Given the duration of conduct at issue in some of these actions, the SEC enforcement staff may rely more heavily on other remedies going forward. For instance, in order to offset the loss of disgorgement in some actions, the SEC may seek to impose higher civil monetary penalties or seek more aggressive disgorgement amounts for conduct occurring within the statute of limitations.
The SEC Division of Enforcement purportedly streamlined internal procedures and made efforts to expedite investigations in recent years. While the fruits of these efforts have not always been apparent, in the wake of the Kokesh decision, there may be a renewed emphasis on streamlining enforcement investigations.
The Court’s ruling in Kokesh contained a footnote that may open the door to challenges as to whether courts can impose disgorgement at all in enforcement cases brought by the SEC or other government agencies, such as the Commodity Futures Trading Commission. The Court stated, “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.” Based on the nature of the questioning at oral argument, the Court may be skeptical of the SEC’s authority to seek disgorgement absent explicit statutory authority. Congress has authorized the SEC to seek disgorgement in administrative proceedings but has not specifically authorized civil disgorgement in other venues. See 15 U.S.C. § 78u–2(e).
Finally, in order to remediate the consequences of long-running frauds, the SEC could resort to other equitable remedies that may survive the limitations imposed by Kokesh. For example, the SEC could seek the appointment of a receiver with the authority to marshal assets for the benefit of claimants, or restitution where the objective is more clearly remedial and not a sanction by the government — the characteristics that the Court viewed as penal in the disgorgement context. Any such efforts would have to overcome the skepticism expressed during oral argument and described in the footnote above as to whether any equitable remedies beyond those expressed in the statute are available to the SEC.”
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