Report Shows 2016 Record-Setting Year for Class Action and SEC Settlements

Last week, proxy advisory firm Institutional Shareholders Services (“ISS”) published its semi-annual report of the top 100 U.S. securities class action settlements and top 50 SEC settlements of all time, as of December 31, 2016. The report adds thirteen new class action settlements from last year – making 2016 the most represented year in the report’s settlement rankings – along with two new top SEC settlements.

The ISS report ranks, among other things, the top 100 shareholder class action settlements ever reached in the U.S. for actions filed on or after January 1, 1996, when the Private Securities Litigation Reform Act was implemented. ISS’s June 2017 report reflects that there were 137 court-approved securities class action settlements in the US in 2016, remaining steady with 2015. Notably, however, 13 of the 137 class action settlements were among the top 100 shareholder class action settlements, resulting in a total approved settlement fund of over $5.6 billion, the largest in a single year. The largest of these 13 settlements was in Lawrence E. Jaffe Pension Plan v. Household International, Inc., et al., Case No. 02-CV-05893 (N.D. Ill.), which was based on claims of fraudulent misrepresentations concerning allegedly illegal sales techniques, predatory lending practices, and accounting manipulations. In December 2016, the Northern District of Illinois approved a final settlement fund of $1.58 billion, resulting in the seventh largest securities class action settlement in U.S. history. READ MORE

Supreme Court Unanimously Limits the SEC’s Ability to Seek Disgorgement

This week, the United State Supreme Court finally resolved a circuit split and unanimously held that SEC actions seeking to disgorge ill-gotten gains are subject to a five-year statute of limitations on civil fines, penalties or forfeitures under 28 U.S.C. § 2462.  This decision is expected to dramatically reduce the SEC’s ability to collect disgorgement in enforcement actions.

The decision arose out of an SEC enforcement action brought in 2009 that alleged between 1995 and 2006, Charles Kokesh, a New Mexico-based investment adviser, misappropriated $35 million from two investment advisory companies he owned and controlled, thereby squandering the money of tens of thousands of small investors. Kokesh was ultimately found liable at trial and the trial court ordered him to disgorge the entire $35 million he was found to have misappropriated plus interest, and pay a civil monetary penalty.  Kokesh subsequently challenged the disgorgement order before the U.S. Court of Appeals for the Tenth Circuit, arguing that the SEC’s claim for disgorgement was subject to the five year statute of limitations period codified in Section 2462, and therefore the $35 million disgorgement amount should be significantly reduced by eliminating any ill-gotten gains received prior to 2004—five years prior to the initiation of the SEC enforcement action.  A three judge circuit court panel of the Tenth Circuit unanimously disagreed, and upheld the disgorgement order on the basis that disgorgement is not a “penalty” or “forfeiture” as defined in Section 2462, but rather was “remedial” and “does not inflict punishment” because it leaves the wrongdoer “in the position he would have occupied had there been no misconduct.”  On this basis, the Tenth Circuit held that Section 2462’s limitations period was inapplicable to disgorgement. READ MORE

SEC’s 2016 Activity Breaks Enforcement and Whistleblower Records

Earlier this month, the SEC (the “Agency”) announced that it initiated a record-breaking 868 enforcement actions in fiscal year 2016. This figure – along with other milestones – reflect the Agency’s commitment to expanding the scope and reach of its enforcement programs to pursue an array of federal securities law violations.


If the SEC Misses the SOL, It’s SOL (Sorry, Out of Luck) – District Court Holds Statute of Limitations Is Jurisdictional and Applies to SEC Disgorgement and Injunctive Relief Requests

The SEC suffered a blow very recently when Judge James Lawrence King of the U.S. District Court for the Southern District of Florida entered summary judgment  dismissing the entirety of its alleged Ponzi scheme case on statute of limitations grounds.  SEC v. Graham, 2014 WL 1891418 (S.D. Fla. May 12, 2014).  The court’s order is a significant application of last year’s Supreme Court decision in Gabelli v. SEC, 133 S. Ct. 1216 (2013), in that (i) it applies the applicable statute of limitations to sanctions that have usually been considered equitable, rather than punitive, in nature; and (ii) it holds that the applicable statute of limitations is a jurisdictional threshold on which the SEC bears the burden, not an affirmative defense on which the defendant bears the burden.

In Graham, the SEC alleged that five defendants defrauded nearly 1,400 investors of more than $300 million by marketing unregistered securities as real estate investments and guaranteeing an immediate 15% profit and future rental revenue on certain resort properties.  According to the SEC, the defendants were using the new deposits to pay earlier investors in a classic Ponzi-scheme.  After the defendants abandoned their efforts with the collapse of the real estate and credit markets in 2007, the SEC embarked on a seven-year investigation, and ultimately brought suit in January of 2013.  The SEC alleged five counts of violations of federal securities laws, and sought not only civil penalties but also injunctive relief and disgorgement of all ill-gotten gains.  The defendants moved for summary judgment on the ground that the five-year statute of limitations under 28 U.S.C. § 2462 time-barred all of the SEC’s claims.  Section 2462 states, “Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued ….”


Trading on Tips: SEC May Seek Disgorgement from Trader for Gains in Investment Fund

A trader who uses material nonpublic information to execute trades but does not personally benefit from the resulting gains may nonetheless face disgorgement of all profits, according to a recent Second Circuit opinion.  In Securities Exchange Commission v. Contorinis, No. 12-1723, the Second Circuit affirmed a judgment from the Southern District of New York requiring defendant Joseph Contorinis, a former hedge fund manager at Jeffries & Co., to disgorge nearly $7.3 million in profits realized through an investment fund he had managed.  The court rejected the argument a person can only disgorge profits that are personally enjoyed and instead found that disgorgement may also apply unlawful gains that flow to third parties.  Relying on a principle that the limit for disgorgement is the total amount of gain flowing from illegal action, the Second Circuit concluded that district courts may impose disgorgement liability for gains that flow to third parties. READ MORE