On January 1, 2021, Congress rang in the new year by enacting the National Defense Authorization Act. Buried deep in the annual defense bill is an important group of securities law amendments that strengthen the SEC’s enforcement powers in the wake of potential enforcement restrictions resulting from the Supreme Court’s recent decisions in Kokesh v. SEC and Liu v. SEC (the Amendments). The Amendments double the SEC’s statute of limitations for disgorgement to 10 years in intentional fraud cases, grant the SEC 10 years to seek equitable relief in all cases, codify the SEC’s ability to obtain disgorgement in federal court proceedings, and make other changes that expand the SEC’s enforcement authority.
The Kokesh and Liu cases
The ability to seek disgorgement has long been part of the SEC’s enforcement arsenal, along with conduct-based injunctions, industry bars, and other forms of equitable relief, as well as civil money penalties. For decades, SEC disgorgement was viewed as an equitable remedy, meaning the SEC could recover ill-gotten gains from defendants, no matter the age of the alleged misconduct and with few limitations on the scope of the amounts recovered. But the Supreme Court’s recent Kokesh and Liu decisions upended that view and significantly limited the SEC’s ability to seek disgorgement.
In June 2017, the Supreme Court held in Kokesh that SEC disgorgement is a penalty and, therefore, subject to the five-year statute of limitations in 28 U.S.C. § 2462 (see prior alert here). And in June 2020, the Court held in Liu that disgorgement may be considered equitable relief permissible under Section 21(d)(5) of the Exchange Act – a win for the SEC – but only after deducting legitimate expenses incurred by the defendant and only if the disgorgement is awarded for the benefit of the victims (as discussed in greater detail here). Both Kokesh and Liu left thorny questions in their wake (including whether the Court’s rationale in Kokesh could be extended to similarly limit other SEC remedies, such as injunctions or industry bars), and hampered the SEC’s ability to seek disgorgement in enforcement actions by limiting both the temporal reach and amount of disgorgement that the SEC could collect.
The SEC’s new enforcement powers
The Amendments revive, to some extent, an expansive disgorgement regime by directly addressing some of the limits imposed by Kokesh and Liu, in addition to granting the SEC new enforcement powers. Specifically, the Amendments:
- Expressly authorize the SEC to seek, in federal courts, "disgorgement . . . of any unjust enrichment by the person who received such unjust enrichment as a result of such [a securities law] violation." The SEC can now rely on express authority to seek disgorgement rather than the implied authority of Section 21(d)(5) of the Exchange Act, as extended by the Supreme Court in Liu.
- Establish a default five-year statute of limitations period for disgorgement claims, and a 10-year statute of limitations if the disgorgement claim involves conduct that violates certain antifraud provisions, namely: (1) Section 10(b) of the Exchange Act, (2) Section 17(a)(1) of the Securities Act, (3) Section 206(1) of the Advisers Act, or (4) “any other provision of the securities laws for which scienter must be established.” This expanded statute of limitations reverses to some extent the time restrictions imposed by Kokesh, permitting the SEC to seek disgorgement for a longer period of time than permitted by the Supreme Court in the most serious cases. The five-year statute of limitations for civil penalties remains the same.
- Establish a 10-year statute of limitations for "any equitable remedy," including injunctions, bars, suspensions, and cease-and-desist orders, starting from the "latest date on which a violation that gives rise to the claim" for the remedy occurs. No showing of intent or knowledge of wrongdoing is required.
- Toll the disgorgement and equitable relief statute of limitations for "any time" in which the defendant is "outside the United States."
Significantly, the Amendments apply not only to future actions and proceedings, but also apply to pending actions and proceedings.
The Amendments expand the time frame for the SEC to seek disgorgement and other relief and will impact potential defendants going forward:
- Not only is disgorgement here to stay after Kokesh and Liu, it is now expressly authorized.
- The SEC is now empowered to seek disgorgement (in some cases) and equitable relief related to alleged misconduct that occurred up to 10 years ago, and perhaps even longer if the defendant traveled or resided outside the United States during the relevant time period.
- Despite resolving some questions raised by Kokesh and Liu, the Amendments raise a host of new questions with which courts and litigants will continue to wrestle. For instance, does the new disgorgement provision require the relief to benefit the victims (as Liu required for Section 21(d)(5))? Is the "unjust enrichment" language in the new disgorgement provision a codification of Liu’s holding, or does it mean something else? How will the tolling provisions apply to multinational defendants who are based in multiple countries or who frequently travel internationally? And how will the SEC apply the Amendments to "pending" actions?
Find out more about the implications of the Section 6501 Amendments by contacting any of the authors or your DLA Piper relationship partner.