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The Supreme Court has given the Securities and Exchange Commission a difficult choice: Work faster or get Congress to change the law.
At issue is the court’s ruling a year ago in Kokesh v. Securities and Exchange Commission. The decision imposed a five-year window on the agency to seek repayment of any ill-gotten gains. Already, the decision has resulted in the dismissal of an overseas bribery case because the S.E.C. took too long to file the charges and has spurred a lawsuit demanding that the agency repay billions of dollars it has recovered in other cases.
The challenge for the S.E.C. will be whether it can adjust to the restrictions without their hindering its enforcement. If the agency can’t, it will have to persuade Congress to give it more time to pursue charges when the underlying misconduct might not come to light until years later.
On July 12, Judge Nicholas G. Garaufis of Federal District Court in Brooklyn dismissed civil charges against Michael L. Cohen and Vanja Baros, two former executives at the hedge fund Och-Ziff Capital Management. They had been accused of bribing African officials in exchange for business.
The S.E.C. filed its case in January 2017. Five months later, the Supreme Court ruled in Kokesh that when the commission seeks disgorgement of ill-gotten gains from a defendant, it must — under the federal statute of limitations — file the charges within five years of the violation.
Disgorgement had long been thought to fall outside the statute of limitations because it seeks to take back what a defendant received unlawfully. But the court took the view that such repayments are a type of penalty and therefore subject to the five-year filing requirement.
The S.E.C. had not anticipated the court’s ruling in seeking disgorgement in the case against Mr. Cohen and Mr. Baros and was caught flat-footed. The agency had sought to protect itself from losing the case completely by getting Mr. Cohen to agree to a “tolling agreement,” which turns off the clock for the statute of limitations for a limited period.
Unfortunately, the agreement was narrowly drawn, and covered possible violations arising only from its investigation involving the Libyan Investment Authority. The charges the S.E.C. filed later were far broader and had little to do with that investigation.
The S.E.C. could respond to the Kokesh case by requesting broader tolling agreements when it starts to bump up against the five-year limit. Defendants often agree to these agreements in the hope that the S.E.C. will decide to pass on pursuing a case, or at least to appear cooperative. But lawyers for those under investigation are likely to balk at an across-the-board waiver if it puts their clients at greater risk.
The Supreme Court’s decision also spawned a class-action lawsuit in Boston seeking reimbursement from the S.E.C. of over $14 billion paid by defendants in disgorgement for conduct that was more than five years old. A hearing was held Tuesday on the agency’s motion to dismiss the case, and the judge has not yet ruled on it. If the S.E.C. is unsuccessful, it may face claims in numerous cases to repay amounts that it received for misconduct beyond the limitations period.
A better approach for the S.E.C. may be to ask Congress to lengthen the statute of limitations for disgorgement. It is common for misconduct involving accounting issues and fraudulent trading, such as a Ponzi scheme, to come to light years after the misdeeds took place. Five years may not be enough time to get back money from those violations. In other words, the thief may get to keep what was stolen.
There is precedent for congressional action. In 1989, at the height of the savings-and-loan crisis, Congress adopted the Financial Institutions Reform, Recovery and Enforcement Act, which extended the statute of limitations for bank-related crimes to 10 years from five because of the complexity of the investigations. The extension applied to civil bank fraud claims, which allowed the Justice Department to obtain multibillion-dollar settlements with large banks like JPMorgan and Bank of America over mortgage practices in the years before the financial crisis in 2008.
Whether Congress is amenable to giving the S.E.C. more time to pursue cases is an open question, and Wall Street is sure to oppose such a move.
To get Congress to change the law, the S.E.C. may need a situation that starkly shows the problem posed by the five-year limitation. Nothing motivates Capitol Hill like a gripping story of someone getting off on what looks like a technicality. Absent that, enforcement of the securities law will require a quicker response from the S.E.C. to wrongdoing, a significant challenge when violations are hard to identify and may not surface quickly.
