US Supreme Court limits the SEC to 5-year disgorgement remedy

/ Global Compliance Solutions Group LLC/

On Monday, June 5th, the U.S. Supreme Court, in a 9-0 ruling (Kokesh v. SEC), limited the Securities and Exchange Commission's ability to obtain profits from a defendant.  The ruling found that the SEC's "disgorgement" remedy is subject to a five-year statute of limitations.  In 2013, the Supreme Court also ruled (Gabelli v. SEC) that civil monetary penalties are subject to a five-year limitation.

Background

The SEC brought an enforcement action against Charles Kokesh in which they alleged he had violated various securities laws.  The allegation claimed Kokesh violated SEC laws by misappropriating $34.9 million from four businesses from 1995-2009.  As a result the SEC sought civil penalties and a $34.9 million disgorgement. 

A jury found that the defendant had in fact violated securities laws.  The District Court applied the 5-year limitation to the civil penalty, but found that the $34.9 million disgorgement was not a "penalty" and not subject to a five year statute of limitation.  The Tenth Circuit agreed with the District Court and held that disgorgement was neither a penalty nor a forfeiture.

Ruling

Justice Sotomayer, writing for the unanimous Court said the following:

"Because SEC disgorgement operates as a penalty under §2462, any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accured."; and

"The application of these principles here readily demonstrates that SEC disgorgement constitutes a penalty within the meaning of §2462.  First, SEC disgorgement is imposed by the courts as a consequence for violating public laws...Second, SEC disgorgement is imposed for punitive purposes."

Consequences

The ruling provides a little more clarity for companies as to what disgorgement amounts they may have to pay if found guilty of violating a securities law.  As a result of this ruling, the SEC is likely to move more quickly to bring cases to a conclusion.      

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SEC Acting Chairman Issues Statement on Conflict Minerals Rule

/ Global Compliance Solutions Group LLC/

An April 2014 D.C. Circuit Court of Appeals decision determined that portions of the U.S. Securities and Exchange Commission ("SEC" or "Commission") Conflict Minerals Rule (the "Rule") violated the First Amendment.  Because of that decision, the Commission issued a stay on the compliance date for portions of the Rule that were found to be unconstitutional.

Since the Appeals court decision, litigation in the case has continued and the temporary transition period found within the Rule has expired.  As of January 1, 2017, all applicable issuers fall outside the terms of the transition period.  

With that as background, on January 31, acting SEC Chairman Michael S. Piwowar issued a public statement on the Rule.  In his statement, acting Chairman Piwowar announced that he has asked his staff to consider the continued appropriateness of the 2014 Commission guidance and whether any additional relief from the Rule is warranted.  

In an additional statement Chairman Piwowar discusses the negative impact the Rule has had on legitimate mining operators and questions whether or not the rule has resulted in "any reduction in the power and control of armed gangs or eased the human suffering of many innocent men, women, and children in the Congo and surrounding areas."

Chairman Piwowar is asking for public comments, over the next 45 days, on the rule and on the 2014 guidance.  Click here to access the SEC comment page.  

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