US SEC would get twice as much time to recoup illicit profits under bill passed by Congress

14 December 2020 00:00 by Neil Roland

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The US Securities and Exchange Commission could recover ill-gotten gains from a wrongdoer for up to 10 years after fraudulent conduct, rather than just five, under defense legislation passed by Congress and sent to the White House.

The extension would most likely help investors, victimized in Ponzi and other long-running fraud schemes, whose eligibility to collect SEC disgorgement penalties had previously run out.

“With disgorgement being available for 10 years after the alleged wrongdoing, we expect to see the SEC demand markedly increased amounts in settlements and in administrative and court actions as well,” the BakerHostetler law firm said in an alert Saturday.

The 4,517-page bill also gives the SEC 10 years to suspend or bar broker-dealers, investment advisers and their associates from working in the industry.

The SEC provision is tucked in the $732 billion annual defense authorization bill, backed with bipartisan support, that was sent to President Donald Trump on Friday for his signature. He has threatened to veto it because it doesn’t revoke a law protecting technology companies such as Facebook and Twitter from liability for what appears on their platforms.

— Supreme Court decision —

In 2017, the Supreme Court imposed a five-year statute of limitations on disgorgement obtained by the SEC.

Disgorgement “is intended to deter, not to compensate,” Justice Sonia Sotomayor wrote in the court decision on the Kokesh v. SEC case.

SEC enforcement officials have said the decision deprived investors of more than $800 million that could have been recouped during a 12-month period in 2017-18.

The commission returned $1.07 billion to harmed investors in the fiscal year ending September 2017.

— Use of federal courts —

The BakerHostetler alert, whose lead author was former House Financial Services Committee Chief Counsel Kevin Edgar, also said the bill would likely increase the SEC’s use of federal courts rather than administrative proceedings, which have been assailed in recent years.

Congress may also expand support for SEC authority, “particularly under a Biden administration that will likely emphasize and increase agency enforcement, inspection and examination efforts,” the alert said.

—With reporting by Claude Marx

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