The relevant provisions were inserted in the National Defense Authorization Act for the 2021 fiscal year (pages 1238-1239) that we have already mentioned.

The amendments that this legal act introduced to the Securities Exchange Act expanded the SEC’s authority “to seek disgorgement of any unjust enrichment by the person who received such unjust enrichment as a result of a violation” of the federal securities laws in federal court actions*.

The amendments also provide a new ten-year statute of limitations for the SEC’s disgorgement claims arising from violations that involve intentional fraud, as well as for injunctions, bars, suspensions and cease-and-desist orders.

These amendments will allow the SEC to avoid the limitations previously imposed by the courts on the enforcement of disgorgement. 

1. The Kokesh case

Disgorgement as such is an “equitable remedy” rather than a “penalty”, and is normally enforced by the courts to repair the damage caused by unlawful activities.

However, the SEC considers disgorgement enforced in most FCPA proceedings as a form of sanctions with its amount considerably exceeding the penalty imposed: for instance, in the Juniper Networks case in 2019 the corporation agreed to pay roughly $10.8 million as a return of ill-gotten funds to the SEC and only $3 million as a civil penalty, while in the Congnizant case in 2019 - $16.4 million and $6 million respectively.

In spite of the fact that there had been a long expert debate over whether disgorgement could have been considered as a sanction, the 2017 ruling in Kokesh v. SEC closed the subject: the court held that disgorgement (i) is aimed at repairing the wrong to the public rather than to the individual, and (ii) is sought for the purpose of punishment, and to deter others from offending in like manner rather than for compensation, which means it has punitive purposes.

The broad employment of disgorgement by the SEC in its proceedings was primarily due to the fact that before the Kokesh ruling this measure was not considered as a “sanction”, which meant that it was not subject to the legal provisions on statutes of limitations. As a result, in the event that the SEC could not impose a civil fine or penalty due to the fact that the unlawful activity took place beyond the statute of limitations, it could employ disgorgement as financial sanctions: for instance, in the civil proceedings against Eni, which concluded with holding the corporation liable in 2020, the investigation took almost ten years, having started in 2010. 

However, after the Kokesh ruling the SEC’s powers were considerably limited: the court held that if disgorgement is a “punitive” measure, the possibility to apply it depended on the statute of limitations as in the case of other sanctions, therefore this measure could not be used five years after the information regarding the crime was obtained.

Although the new provisions in the Securities Exchange Act do not reinstate the unlimited period for SEC’s disgorgement, they double the limitations period for disgorgement claims under Section 10(b) of the aforementioned Act, Section 17(a)(1) of the Securities Act of 1933, Section 206(1) of the Investment Advisers Act of 1940 and to “any other provision of the securities laws for which intentional fraud must be established” (violations of the FCPA provisions also fall under this category).

2. The Liu case

The ruling of the Supreme Court of 22 June 2020 regarding the appeal in Lui v. SEC limited further the powers of the SEC in the application of disgorgement. In this case, the petitioners Charles Liu and Xin Wang appealed to the Court claiming that Congress had never granted the right to seek disgorgement to the SEC. They had been accused by the agency of having solicited foreign nationals to contribute though investment visas to the presumed construction of a cancer-treatment center, which had never been completed. The wrongdoers had to pay the disgorgement equal to the amount of their net profits (roughly $27 million) and a fine of $8 million.

Eight out of nine justices of the Supreme Court declined the petition of Liu and Wang and held that the SEC could resort to disgorgement in court proceedings (the only member of the Supreme Court supporting the plaintiffs’ position that disgorgement was not a sanctioned equitable remedy was conservative Clarence Thomas). The Court stressed that although the federal legislation did not provide directly the SEC with such authority, the Securities Exchange Act stipulated that in any proceedings regarding violations of the securities exchange legislation it did have the right to claim that courts might “grant any equitable relief that may be appropriate or necessary for the benefit of investors” and courts had to honour that claim.

At the same time, the Court held that there are certain limits to the enforcement of this measure by the SEC:

1) A disgorgement award should not exceed a wrongdoer’s net profits from unlawful activities,

2) It should be aimed at awarding equitable relief to the alleged victims of such activities rather than simply stripping the accused from their ill-gotten gains.

Besides that, the Court observed that joint-and-several liability against co-defendants for disgorgement awards, which the SEC has routinely sought, is, at least in certain cases, inconsistent with principles of equity.

The new amendments to the Securities Exchange Act officially authorised the SEC to use disgorgement as an independent statutory provision rather than an “equitable relief” for victims. While the amendments do not expressly authorize the SEC to seek awards in excess of net profits or joint-and-several liability, the amendments equip it with a potential argument that disgorgement need not conform to the equitable principles indicated by the Court and stating that disgorgement “should be appropriate or necessary for the benefit of investors”.

3. Limits of the amendments

The amendments, however, do not provide any definition of a “return of ill-gotten funds” and “ill-gotten funds”, thereby failing to set up the procedure for determining the amount of disgorgement. Therefore, the calculation of disgorgement, including the issue of whether it is appropriate to include the actual expenses incurred in it as stressed in the ruling of the Supreme Court in Liu v. SEC, will be addressed in each case by the respective district court. 

Moreover, some experts stress that the provisions regarding the “extension” of the limitations period for the SEC’s claims for injunctions, bars, suspensions and cease-and-desist orders, in fact, restrict rather than extend the authority of the agency: before the amendments the majority of federal appellate courts agreed that injunctive relief in SEC enforcement actions was not subject to any statute of limitations at all - the SEC was free to bring claims for injunctions decades after the underlying conduct occurred.

Finally, the amendments and the preceding ruling of the Supreme Court regard only the cases resolved in court proceedings. However, over the recent years most SEC’s cases concerning violations of the FCPA provisions have been resolved within administrative proceedings: for instance, in the period between 2015 and 2020, settlements were reached only in 6 out of 69 civil court proceedings against legal persons. When the cases are resolved outside the court, the law has already authorised the SEC to claim the return of ill-gotten funds (article 77h-1(e), Section 15 of the United States Code), and the five-year statute of limitations in such cases remains unchanged.

*It should be reminded that the US Foreign Corrupt Practices Act (FCPA) constitutes a part of the Securities Exchange Act, and the SEC along with the US Department of Justice is its key enforcement agency.