On March 3, 2020, the Supreme Court heard arguments in the case of Liu v. SEC, No. 18-1501. This article summarizes what transpired at the hearing, in which the arguments centered on a challenge to the ability of the U.S. Securities and Exchange Commission (“SEC”) to obtain disgorgement as an “equitable remedy” for securities law violations.
During the oral arguments, the Justices’ questions indicated that they appeared reluctant to entirely do away with disgorgement, but rather their queries focused on whether limitations should be placed on the SEC’s continuing use of disgorgement as an equitable remedy. Specifically, the Justices expressed interest in exploring parameters and limitations regarding how disgorgement is calculated and whether the SEC or defrauded investors are entitled to any disgorged funds.
The SEC’s SCSD Initiative Second Wave and the Applicability of the President’s Recent Executive Order
On September 30, 2019, the SEC ordered an additional 16 self-reporting investment advisory firms to pay nearly $10 million in disgorgement. Some have referred to this as the “second wave” of the SEC Division of Enforcement’s Share Class Selection Disclosure Initiative (“SCSD Initiative”). It’s unclear if there will be another “wave” of SCSD Initiative settlements. What is clear, though, is that the number of self-reporting firms charged by the SEC so far totals ninety-five. When the SCSD Initiative was first announced many anticipated that the tally of firms charged would number in the hundreds, but the number remains under 100.
While the number of self-reporting firms is still significant and indicates that this was an industry issue, it may also signal that many firms elected to take their chances and not self-report. Along those lines, the SEC also announced that same … Read More »
The SEC announced settlements with an auditing firm (the “Firm”) and one of its partners relating to violations of certain auditor independence rules involving nineteen audit engagements with fifteen SEC-registrant issuers.
More specifically, the SEC found the Firm and its partner violated the Commission’s and Public Company Accounting Oversight Board’s (“PCAOB”) auditor independence rules. The alleged conduct involved performing prohibited non-audit services, including exercising decision-making authority in the design and implementation of software relating to one of its issuer client’s financial reporting as well as engaging in management functions for the company. The partner was responsible for supervising the performance of the prohibited non-audit services. Additionally, the SEC charged additional PCAOB-rule violations for failing to notify the clients’ audit committees about the non-audit services. The SEC described these failures as “mischaracterized non-audit services” despite the services involving financial software “that … Read More »
On June 5, 2017, the Supreme Court of the United States released its unanimous opinion in Kokesh v. Securities and Exchange Commission and established that “SEC disgorgement constitutes a penalty within the meaning of § 2462” and therefore is restricted by the applicable 5-year statute of limitations. As predicted in our previous blog post, the Court determined that the SEC cannot impose disgorgement fees without regard to statute of limitations.
The Supreme Court determined that SEC disgorgement “bears all the hallmarks of a penalty” and therefore should be subject to the 5-year statute of limitation in § 2462 for three main reasons: (1) “SEC disgorgement is imposed by courts as a consequence for violation” of public laws, i.e. for violations committed against the United States rather than a “aggrieved individual”; (2) “SEC disgorgement is imposed for punitive purposes” such as deterrence, … Read More »
Kokesh v. Securities and Exchange Commission: A New Limitation to the Government’s Enforcement Power?
The United States Supreme Court will soon decide whether the SEC can continue to impose disgorgement fees without regard to any statute of limitations. Based on the oral argument in Kokesh v. Securities and Exchange Commission, held on Tuesday, April 18, 2017, it appears likely that the Court will determine that the SEC does not have the wide power it claims in pursuing disgorgement, or the return of profits made from illegal actions.
The petitioner, Charles Kokesh, was the owner of two registered investment advisers. Between 1995 and 2006, he misappropriated $34.9 million from the business development companies operated by the investment advisers. The SEC pursued civil enforcement actions against him in 2009 and the jury found he violated the Securities Exchange Act, the Investment Advisers Act and the Investment Company Act. The United States District Court for the District of … Read More »
Broker Pays $2.5 Million Fine for Using Market Volatility to Hide Markups Yielding Unearned Commissions
Last week, Louis Capital Markets, L.P. (“LCM”) agreed to disgorge $2.5 million in settlement of charges that it charged false execution prices to its customers in order to generate secret commissions.
LCM executed orders to purchase and sell securities for its clients, without holding any securities in its own account and thus bore no market risk, i.e., riskless principal trades. It purported to generate profits by charging customers small commissions, typically between $0.01 and $0.03 per share. LCM, however, unbeknownst to customers, inflated those commissions, by embedding undisclosed markups and markdowns into reported execution prices. LCM provided those false execution prices—either lower sales prices or higher purchase prices than LCM actually obtained in the market—to its customers. Critically, LCM did not engage in this deceptive behavior for every trade, rather “LCM opportunistically added markups/markdowns to trades at times when customers were … Read More »
We previously wrote about how the SEC urged the Supreme Court to grant certiorari in Kokesh v. SEC, and on Friday, January 13, the Court did just that. In an order without comment, the Court granted certiorari after both the petitioner and the SEC requested the Court’s review, albeit for different reasons. While the petitioner believes he should not be subject to disgorgement for ill-gotten gains that were obtained more than five years ago, the SEC wants the Court to bring clarity to the circuit split that has developed since the Eleventh Circuit’s decision in SEC v. Graham, which held that the five-year statute of limitations applies to disgorgement. As we previously noted, the SEC argued that Graham impedes its ability to achieve uniformity in the administration of securities laws.
We will continue to monitor developments in this case, which is … Read More »
We previously posted about how the Southern District of Florida’s and Eleventh Circuit’s decisions in SEC v. Graham undermined the SEC’s long-held position that disgorgement was not subject to the five-year statute of limitations. The SEC recently asked the Supreme Court to examine that decision by joining the petitioner’s request for certiorari in Kokesh v. SEC, a case in which the Tenth Circuit affirmed an award of disgorgement, holding that the five-year statute of limitations did not apply.
In Kokesh, the SEC obtained a final judgment in 2014 that included nearly $35 million of disgorgement that covered ill-gotten gains obtained as far back as 1995. The Tenth Circuit affirmed the final award, diverging with Graham, and holding that disgorgement was not a penalty or forfeiture to which the five-year statute of limitations applied. Kokesh applied for certiorari.
Last week, the SEC urged … Read More »
We previously wrote about decisions in SEC v. Graham from the Eleventh Circuit, __ F.3d __, No. 14-13562, 2016 WL 3033605 (11th Cir. May 26, 2016), and the U.S. District Court for the Southern District of Florida, 21 F. Supp. 3d 1300 (S.D. Fla. 2014), considering whether disgorgement claims and other remedies were subject to five-year statute of limitations on actions “for the enforcement of any civil fine, penalty, or forfeiture” codified in 28 U.S.C. § 2462. The Eleventh Circuit affirmed the decision of the lower court that the SEC’s disgorgement claims were time-barred, holding that “disgorgement” is synonymous with the plain meaning of “forfeiture” as it is used in the statute.
On May 6, 2016—shortly before the Eleventh Circuit issued its ruling in Graham—the IRS published non-precedential Chief Counsel Advice (“CCA”) on whether Internal Revenue Code Section 162(f) bars business expense … Read More »