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The Securities and Exchange Commission could find it harder to settle actions under a June 5 U.S. Supreme Court ruling limiting its ability to recoup ill-gotten gains, attorneys said ( Kokesh v. SEC , U.S., No. 16-529, 6/5/17 ).
Entities that no longer face the risk that the SEC will reach back to seek recovery of unlawful profits far into the past may be more likely to resist settlement, securities lawyers told Bloomberg BNA after the decision was announced.
“The move removes ammunition from the arsenal of the SEC in negotiating potential settlements with public companies, investment advisors and others since there no longer is any open question as to how far back the SEC can go in seeking disgorgement,” Ronald S. Betman of Ulmer & Berne LLP, Chicago told Bloomberg BNA.
The SEC may also face renewed challenges from parties that have already paid disgorgement orders now that the Supreme Court has ruled on the issue.
A unanimous court dealt the agency a blow when it concluded that the “disgorgement” remedy “bears all the hallmarks of a penalty” within the meaning of a five-year federal limit on penalty actions. The SEC extracted $3 billion in disgorgement payments in 2015—more than double the amount it collected in other types of monetary sanctions. At oral argument in late April, several justices said they thought the agency was going too far.
New York lawyer Jack Yoskowitz, who represents clients in securities regulatory matters, said the decision will bring certainty to investigations and enforcement actions where the threat of multi-year disgorgement had sometimes forced accused parties to settle.
“Where the SEC was taking an aggressive position to try and force the respondent to settle because of the threat of a large verdict, I think this will embolden those respondents to fight back,” Yoskowitz said. On the other hand, he said, some cases could settle faster because there may now be certainty as to how much disgorgement the SEC can seek in court.
Future SEC examinations will also be reshaped because their scope will now be limited, Boston securities lawyer R. Daniel O’Connor of Ropes & Gray LLP told Bloomberg BNA. Washington lawyer Saskia Zandieh of Miller & Chevalier, who focuses on corporate compliance and white-collar defense, said the decision will pressure the SEC to resolve cases more quickly and to tailor its limitations waivers more narrowly than in the past.
San Francisco securities lawyer Jonathan A. Shapiro, Baker Botts LLP, disagreed. He said that while the ruling was “absolutely correct,” and may impact a number of cases based on very old misconduct, it will have “zero impact” on the SEC’s ability to bring cases long term. There is no reason it can’t bring whatever cases it thinks it has within five years, he said.
Through a spokeswoman, the SEC declined to comment.
People probably won’t be able to claw back disgorgement because these cases typically aren’t retroactive, Yoskowitz said. However, he said, even after a settlement, if a case isn’t technically over, “I could see motions being made based on this decision.
According to Shapiro, the strongest cases to challenge would be the relatively small number of actions in which a defendant lost a fully litigated case.
“Anyone who voluntarily settled on terms that included an agreed-upon disgorgement payment—and therefore waived the right to litigate the merits and any disgorgement order—would seem to face a very uphill battle.”
In a footnote, the high court expressly declined to address whether the SEC has authority to impose disgorgement in the first place.
This “seems to imply that this question itself is one that in the future will be open to challenge,” O’Connor told Bloomberg BNA. New York securities attorney Daniel M. Sullivan of Holwell Shuster & Goldberg LLP agreed, saying that the U.S. Supreme Court will “soon” be asked to resolve the issue.
“Only if the entire category of disgorgement is cast into doubt—that is, if the defense bar continues the march by challenging the SEC’s authority to seek that relief absent clear statutory right to do so—would I predict a fundamental shift in the settlement landscape,” Shapiro said.
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