On January 1, 2021, the National Defense Authorization Act became effective after Congress overrode President Trump’s veto. Although unrelated to national defense issues, Section 6501 of the legislation amends Section 21(d) of the Securities Exchange Act of 1934 to double the SEC’s statute of limitations for seeking disgorgement of a defendant’s unjust enrichment from five years to ten years in actions involving scienter-based violations of the federal securities laws (e.g., fraud). This change applies to proceedings that were pending on or commenced after January 1, 2021. Defendants in pending cases are almost certain to raise aggressive challenges in the event the SEC seeks disgorgement based on conduct from more than five years ago.
Congress made this significant expansion in the SEC’s disgorgement authority in response to the Supreme Court’s decision in Kokesh v. SEC, 137 S. Ct. 1635 (2017), in which the high court found that, contrary to the SEC’s view that disgorgement was an equitable remedy and therefore without any applicable statute of limitations, disgorgement is subject to the five-year statute of limitations for civil penalties. The SEC may also attempt to argue that this new disgorgement authority frees it from the additional limitations the Supreme Court placed on disgorgement in Liu v. SEC, 140 S. Ct. 1936 (2020), namely that disgorgement is limited to a wrongdoers’ net profits, as opposed to their gross illicit gains, and the suggestion that the funds should be returned to the victims, as opposed to deposited in the U.S. Treasury. It is not clear, however, that courts would be willing to embrace that argument given the lack of reference to those precise issues in the legislation. Please see our previous articles on the Kokesh and Liu cases.
The SEC’s expanded disgorgement authority is likely to change the dynamic of SEC investigations and enforcement actions. In some circumstances, the SEC may feel less pressure to quickly bring complex fraud-based investigations to closure (although monetary penalties are still subject to a five-year statute of limitations) and may favor charging scienter-based violations to take advantage of the longer disgorgement period. The changes will also shift the settlement calculus of many cases, as the SEC typically seeks prejudgment interest in settlements, and ten years’ worth of prejudgment interest can materially change the dollar amounts involved.