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SEC Disgorgement ‘Critical’ to Stop Fraud, States Tell SCOTUS (2)

Jan. 22, 2020, 4:59 PMUpdated: Jan. 22, 2020, 10:10 PM

The SEC’s ability to recover ill-gotten gains from wrongdoers is “critical” to joint securities enforcement efforts, attorneys general from 23 states and the District of Columbia told the U.S. Supreme Court in a filing.

The bipartisan group of state law enforcement officials urged the court Tuesday to side with the Securities and Exchange Commission when it hears arguments March 3 over whether the agency can continue to pursue disgorgement as a civil remedy in federal court.

Although states have their own securities enforcement programs, “the magnitude and extent of securities fraud makes it impossible” for them “to combat all of the fraudulent conduct that affects their residents and markets without the assistance of federal regulators,” the amicus brief in support of the SEC said.

The agency’s “ability to select the optimal remedy in the forum best suited to address the specific fraud at issue would be diminished” if the high court limits disgorgement to administrative proceedings, the attorneys general said.

“Introducing weakness into the SEC’s well-calibrated enforcement efforts would not only embolden wrongdoers but also undermine the SEC’s ability to play a robust role in the comprehensive federal-state enforcement system that has developed over the past century,” they said.

The SEC’s disgorgement authority is before the high court after a duo on the hook for about $26.7 million in disgorgement in an immigrant investor fraud case successfully petitioned for review.

The Supreme Court in 2017 ruled that disgorgement counts as a penalty for statute of limitations purposes, meaning the SEC now has just five years to bring a case pursuing it. But nothing in Kokesh v. SEC addressed “whether courts possess authority to order disgorgement in SEC enforcement proceedings” at all, the 2017 opinion said.

SEC Woes

Kokesh has prevented the SEC from securing about $1.1 billion in disgorgement, the agency said late last year. SEC Chairman Jay Clayton has expressed frustration with Kokesh, urging Congress to help the agency counteract it.

The House in November passed a bipartisan measure in an effort to address Clayton’s concerns. The Investor Protection and Capital Markets Fairness Act (H.R. 4344) would give the SEC 14 years to pursue disgorgement in federal court.

The Senate also has bipartisan legislation intended to assist the SEC after Kokesh. The Securities Fraud Enforcement and Investor Compensation Act (S. 799), which is pending in committee, would set a statute of limitations on pursuing compensation for investors at 10 years.

The Illinois attorney general’s office took the lead on the amicus brief.

Members of Congress and former SEC officials filed amicus briefs Wednesday backing the agency. Democratic presidential candidates Sen. Amy Klobuchar (D-Minn.) and Rep. Tulsi Gabbard (D-Hawaii), as well as former Democratic SEC Commissioners Luis Aguilar, Roel Campos, Roberta Karmel, and Bevis Longstreth, signed on to the briefs.

Former Federal Trade Commission officials and securities law professors, as well as the North American Securities Administrators Association and investor advocacy group Better Markets, also submitted amicus briefs in support of the SEC this week.

The case is SEC v. Liu, U.S., No. 18-1501, amicus brief filed 1/21/20.

(Updates with background on more amicus briefs.)

To contact the reporter on this story: Jennifer Bennett in Washington at jbennett@bloomberglaw.com; Andrew Ramonas in Washington at aramonas@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Steven Patrick at spatrick@bloomberglaw.com

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