SEC Disgorgement Debated by Supreme Court in 2017

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SEC Disgorgement Debated in Supreme Court

The Securities and Exchange Commission defended its ability to disgorge illegal profits from wrongdoers before the Supreme Court yesterday in Kokesh v. SEC. It was Justice Neil Gorsuch’s second day of oral arguments.  An opinion is expected by the end of the term in July.

The case is now focused on the question of how long the SEC can seek to recover funds through disgorgement. Disgorgement is one of the primary sources of funds recovered for violations of the federal securities laws. Civil penalties are limited both by the five year statute of limitations, according to the 2013 Supreme Court ruling in Gabelli v. SEC, as well as the Congressional limits. The SEC claims disgorgement is not limited by the five-year statute of limitations in 28 U.S.C. § 2462.

In the case at issue, the lower court ordered Kokesh to pay a civil penalty of $2.4 million, disgorgement of $34.9 million, and prejudgment interest of $18.1 million. Kokesh appealed and argued that the 11 year period for disgorgement used in the case was inappropriate.

The SEC argued that there is no statute of limitations because disgorgement is remedial. It is neither a penalty or a forfeiture under Section 2462 according to statutory construction. Moreover, adoption of the defendant’s position would reduce the likelihood that victims are compensated through the distribution of disgorged funds.

The case implicates possible payouts for SEC whistleblowers. If the Court cuts off disgorgement at five years, Kokesh would only pay $7.4 million in disgorgement and penalties (rather than $37.3 million), as well as a correspondingly smaller amount of prejudgment interest. A projected whistleblower award of between $5 million and $16 million under the current system will be valued under the defendant’s system at between $1 and $3 million.

SEC Disgorgement in a Nutshell

The term SEC disgorgement refers to a legal remedy or penalty imposed by the SEC as a consequence of securities law violations. Disgorgement is technically the act of returning or surrendering ill-gotten gains or profits obtained through illegal or fraudulent activities.

When the SEC detects violations of securities laws, such as fraudulent activities, insider trading, or the manipulation of stock prices, it may take legal action against the individuals or entities involved. As part of the enforcement process, the SEC can seek disgorgement of any profits or financial benefits gained from the illegal activities.

SEC Disgorgement Steps

The disgorgement process usually involves the following procedural steps:

    1. Investigation: The SEC investigates potential securities law violations and gathers evidence.
    2. Legal Action: If the SEC determines that violations have occurred, it files a lawsuit or takes administrative action against the responsible parties.
    3. Court or Administrative Proceedings: The case may be heard in federal court or go through administrative proceedings. The SEC presents its evidence, and the defendants have the opportunity to defend themselves.
    4. Disgorgement Order: If the court or administrative body finds the defendants liable for securities law violations, it can issue a disgorgement order. The order requires the defendants to return any profits obtained through the illegal activities.
    5. Calculating Disgorgement Amount: The disgorgement amount is determined based on the profits gained from the violations. The SEC may use various methods to estimate the ill-gotten gains, such as analyzing financial records, tracing transactions, and consulting financial experts.
    6. Distribution of Funds: The disgorged funds are typically returned to affected investors who suffered losses as a result of the securities law violations. The SEC may establish a Fair Fund to hold the disgorged funds and oversee their distribution.

What is a Fair Fund?

A fair fund refers to a financial arrangement created by the SEC  and is established when the SEC recovers funds from a company or individual involved in fraudulent or illegal activities. Those e funds are then distributed to the victims or affected parties.

The purpose of a fair fund is to ensure that the funds obtained through enforcement actions are fairly distributed to those who suffered losses as a result of the misconduct.

Fair funds are a means of providing restitution to victims and can help deter future fraudulent activities by holding wrongdoers accountable for their actions.

Choosing the Right Lawyer

If you possess evidence indicating a possible violation of securities laws, you can get in touch with the knowledgeable whistleblower lawyers at Young Law Group. We offer a complimentary and non-binding consultation, and you can reach them by completing our confidential form or calling (800) 590-4116.