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The U.S. Supreme Court is set to hear arguments next week in a pair of securities cases, one of which could affect the SEC’s ability to pursue enforcement actions involving dated conduct ( Kokesh v. SEC , U.S., 4/18/17 ).
In the enforcement case, the investment adviser principal who was ordered to pay $35 million in disgorgement is arguing that the Securities and Exchange Commission waited too long to sue him.
In the second case, the justices will determine the fate of a class lawsuit against the underwriters of more than $31 billion in Lehman Brothers’ debt offerings ( Calif. Pub. Emp. Ret. Sys. v. ANZ Securities, Inc. , U.S., No. 16-373, 4/17/17 ).
The central question is whether the filing of a class action stops the clock on a three-year time limit set out in 1933 Securities Act Section 13. The resolution depends on whether the high court’s tolling decision in American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), applies.
“This case is of enormous practical importance to investors—particularly institutional investors,” Washington attorney Daniel S. Sommers of Cohen Milstein Sellers & Toll PLLC, told Bloomberg BNA.
In January, the justices agreed to take up the appeal from the California Public Employees’ Retirement System, which alleged that the underwriters didn’t disclose risks related to Lehman investments in subprime mortgages prior to the firm’s collapse. CalPERS claimed it lost millions of dollars when the investment bank failed in September 2008.
The district court dismissed the claims as time-barred and the U.S. Court of Appeals for the Second Circuit affirmed. The appeals court said that the inapplicability of American Pipe tolling to a statute of repose “turns on the nature of the tolling rule and its ineffectiveness against statutes of repose, not on whether the named plaintiffs also have standing to assert claims on behalf of a class.” The decision conflicted with a Tenth Circuit ruling that a pending class action tolls the ‘33 Act’s statute of repose.
In its petition to the high court, CalPERS told the justices that its ’33 Act Section 11 claims would have been timely if the three-year statute of repose had been tolled by the filing of a class lawsuit based on the same alleged misconduct.
“If the Supreme Court disregards its own precedent in American Pipe, investors will no longer be able to rely upon the filing of a class action to protect their rights as they have for decades,” Sommers said. Instead, they’ll be forced to file their own separate lawsuits in order to ensure that their claims don’t become time-barred, resulting in a costly and needless scenario, he said.
CalPERS is represented by Thomas C. Goldstein of Goldstein & Russell PC, Bethesda, Md. ANZ Securities is represented by Victor L. Hou of Cleary Gottlieb Steen & Hamilton LLP, New York.
In the Kokesh case set to be argued the following day, the justices will consider whether or not a five-year federal limitations period governing “penalty” actions applies to SEC disgorgement claims.
The federal appeals courts are divided on whether claims to disgorge unlawful gains are subject to the five-year bar set out in 28 U.S.C. § 2462.
“The real legal question is whether “disgorgement” is an “equitable” remedy that’s always been available to the SEC and isn’t controlled by the statute, or if it’s so much like a penalty that it’s covered by the statute’s five-year period,” Washington lawyer Robert Plotkin of McGuireWoods LLP, Washington told Bloomberg BNA. He said that although it can be difficult for the agency to “ferret out” all of the information it requires to initiate an action within the five years, it seems to be a generally accepted time frame for fairness and due process concerns to be triggered.
The provision that sets forth the five-year statute of limitations doesn’t explicitly mention disgorgement, only saying it applies to “enforcement of any civil fine, penalty or forfeiture.” The U.S. Court of Appeals for the Eleventh Circuit held in 2016 that SEC disgorgement claims must be brought within five years of when the claim accrued. In this case, an enforcement action against former investment advisory principal Charles Kokesh, the Tenth Circuit held otherwise.
Kokesh was ordered to pay $35 million in disgorgement for misappropriating money from investment companies he controlled dating back to 1995. On appeal, he failed to convince the Tenth Circuit that the SEC’s suit was untimely under Section 2462. In January, the high court agreed to take up the controversy.
According to Kokesh, the SEC should be able to collect only $5 million in disgorgement, the amount attributable to the five-year period before the agency filed its claims in 2009.
The Securities Industry and Financial Markets Association, along with others, backed the executive by filing a friend-of-the-court. Disgorgement, however labeled, is a punitive remedy that falls within Section 2462’s express reference to a `penalty’ or `forfeiture’,” the industry trade group told the court.
A decision in favor of Kokesh isn’t likely to have a big impact on the SEC’s regulatory powers, Plotkin said. The commission will just point to some more recent event as the triggering date than on the date the actual transaction occurred, he said.
“Courts are pretty open to finding such distinctions and often get around the limitation,” he said. Alternatively, the SEC would likely be more proactive in seeking tolling agreements from those under investigation, James M. Commons of McDermott Will & Emery LLP, told Bloomberg BNA.
Kokesh is represented by Adam G. Unikowsky of Jenner & Block, LLP, Washington.
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