Securities Litigation

On the new year’s first day, Congress passed the NDAA over President Trump’s veto and gave the SEC more clear – and longer – disgorgement authority for enforcement actions in the courts.  The National Defense Authorization Act for Fiscal Year 2021, H.R. 6395 (116th Cong. 2019-2020) is here.

First, Section 6501(a)(3) of the Act amends Securities Exchange Act Section 21(d), 15 U.S.C. § 78u(d) to provide express statutory authorization for SEC’s disgorgement remedy in court actions:

• (7) Disgorgement.--In any action or proceeding brought by the Commission under any provision of the securities laws, the Commission may seek, and any Federal court may order, disgorgement.

It had been expressly authorized only in administrative proceedings and held merely an equitable remedy in the courts, thus its contours were subject to judicial definition.  In Liu, for example, the Supreme Court imposed limitations, including (a) application only to net profits, (b) typically for victim restitution, and (c) likely not joint and several.  Liu v. SEC, 591 U.S. ___, 140 S. Ct. 1936 (June 22, 2020).

Second, the Act provides an express ten-year statute of limitations for disgorgement actions based upon any underlying offense requiring scienter:

• (8) Limitations periods.--
  • ``(A) Disgorgement.--The Commission may bring a claim for disgorgement under paragraph (7)--
  • ``(i) not later than 5 years after the latest date of the violation that gives rise to the action or proceeding in which the Commission seeks the claim occurs; or
  • ``(ii) not later than 10 years after the latest date of the violation that gives rise to the action or proceeding in which the Commission seeks the claim if the violation involves conduct that violates--
  • ``(I) section 10(b);
  • ``(II) section 17(a)(1) of the Securities Act of 1933 (15 U.S.C. 77q(a)(1));
  • ``(III) section 206(1) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-6(1)); or
  • ``(IV) any other provision of the securities laws for which scienter must be established.

In Kokesh, the Supreme Court had held that disgorgement was a “penalty” and therefore was subject to the five-year limitations period set out in 28 U.S.C. § 2462.  Kokesh v. SEC, 581 U.S. ___, 137 S. Ct. 1635 (2017).  The new limitations periods apply to any action pending on, or initiated after, the Act.

The SEC Enforcement Staff almost certainly will seek to roll-back Liu’s limits on disgorgement, but it remains to be seen whether the Courts will see the Act as a grounds to do so – especially because it did not address them.

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas, and Louisiana. He has over 34 years of experience representing financial institutions in litigation, regulatory, and compliance matters. See attorney profile.