Should the SEC Have 14 Years (Rather than 5) to Recover Funds From Securities Law Violators & Return Them to Defrauded Investors? (H.R. 4344)

What is H.R. 4344?

(Updated January 8, 2020)

This bill would give the SEC up to 14 years to bring cases against securities law violators and recoup funds for defrauded investors in a process called “disgorgement.” Currently, the statute of limitations for disgorgement is five years, as determined by the Supreme Court in in 2017.

Argument in favor

The Supreme Court’s 2017 ruling in Kokesh v. SEC severely hampered the SEC’s ability to force bad actors in the financial services industry to pay injured parties. To date, the Kokesh ruling has allowed criminals to keep $1 billion or more in ill-gotten gains; this is unconscionable, and needs to be fixed. Extending the statute of limitations for disgorgement is reasonable given that certain financial crimes, such as Ponzi-type schemes, are difficult to detect and legally intensive to investigate and prosecute (all of which increases the length of time needed to prosecute them).

Argument opposed

The Supreme Court’s 2017 ruling in Kokesh vs. SEC was appropriate given the finding that the SEC has historically used disgorgement to punish securities fraud perpetrators, rather than to make defrauded investors whole — and punishment isn’t part of the SEC’s mission. Additionally, given that the Supreme Court will take up a case concerning disgorgement itself in Spring 2020, this bill could become a moot point in a matter of months; so it’d be better to wait until SEC v. Liu is decided next year before considering this bill.

Impact

Securities law violators; defrauded investors; disgorgement; statute of limitations for disgorgement; the SEC; and the Supreme Court’s ruling in Kokesh v. SEC.

Cost of H.R. 4344

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Sponsoring Rep. Ben McAdams (D-UT) introduced this bill to restore the SEC’s disgorgement power and thereby give federal securities officials more time to recover ill-gotten gains from white collar criminals who defraud investors. After this bill passed the House Financial Services Committee, Rep. McAdams said: 

“U.S. capital markets are the envy of the world. They promote job growth and economic opportunity.  But they only work to the extent that investors have faith that bad actors cannot profit off wrongdoing.  This legislation extends the time for the Securities and Exchange Commission to get back money from white collar criminals who prey on innocent investors and steal millions to enrich themselves. Those who commit fraud should not profit from their crimes and this bill helps ensure that victims recover what was stolen from them.”

An original draft of this bill had no restriction on disgorgement — the 14-year statute of limitations is a compromise. Explaining the reasoning for the imposition of the 14-year limit, Rep. McAdams says: 

“This bill is a compromise, as some have argued against the statute of limitations and others have argued for a shorter time period. I believe that the 14-year statute of limitations provided in this bill gives the SEC sufficient time to prosecute wrongdoers and would cover almost all major securities violations.”

After this bill passed the House Financial Services Committee, original cosponsor Rep. Bill Huizenga (R-MI) added:

“The latest report from the SEC found that more than $900 million in money swindled from investors through fraudulent activity is unable to be recovered because of a 2017 Supreme Court decision. White collar criminals must be held accountable for their behavior and the SEC must have the necessary tools to recover the losses suffered by Main Street investors. H.R. 4344 helps solve this problem by striking a delicate balance that allows the SEC more time to recover the money that was scammed from hardworking Americans. I am glad to see this bipartisan bill pass committee with strong support.”

The SEC Chairman and other expert witnesses have testified that because certain securities violations, such as Ponzi-type schemes, are difficult to detect and require extensive legal legwork, a solution to the ruling is needed to give the government a longer timeline to make defrauded investors whole after such crimes are detected. At an SEC conference earlier in 2019, SEC Chairman Jay Clayton — who has expressed support for the Senate version of this bill (which imposes a 10, rather than 14 year statute of limitations on disgorgement) and called on Congress to give the SEC more power to get money back from Ponzi schemers or other bad actors after the Kokesh decision — said: 

“Protecting retail investors is a multifaceted effort and includes putting money back in their pockets when they are harmed by violations of the federal securities laws. The impact of was immediate.”

Clayton also said he was “troubled by the substantial amount of losses that we may not be able to recover for retail investors as a result of Ponzi schemes and similar long-running, well-concealed frauds that are perpetrated by smooth talking ‘investment professionals.’”

SIFMA opposes this bill on the grounds that it: 1) exceeds the SEC’s enforcement mission (which is remedial, not punitive, in nature); 2) authorizes the SEC to pursue “old and stale claims”; 3) doesn’t improve monetary recovery for harmed investors; and 4) is redundant, since the Dept. of Justice pursues claims up to 10 years old. In a statement, SIFMA says: 

“SIFMA strongly opposes increasing the statute of limitations period on disgorgement from five years to 14 years, particularly given the SEC has historically used disgorgement to punish respondents, rather than recover monies for investors, as the Supreme Court found in an unanimous opinion written by Justice Sotomayor in the 2017 Kokesh case. The Court appropriately curtailed the SEC’s use of disgorgement to a 5-year limitations period in recognition of its historical overreach in wielding it against respondents and Congress should not upend the reasoned and sound judgment of the Court. The proposed bill is unnecessary for the SEC to accomplish its securities enforcement goals. It fails to better remediate harmed investors, runs contrary to the interests of fair and equitable justice and promotes harmful uncertainty throughout the market.”

This legislation passed the House Financial Services Committee by a 49-5 vote with the support of one cosponsor, Rep. Bill Huizenga (R-MI).

Of Note: This bill was introduced in response to a 2017 Supreme Court decision . In this case, the Court ruled that disgorgement is a penalty, and therefore the SEC’s authority to get convicted fraud perpetrators to return their ill-gotten gains is subject to a five-year statute of limitations. The case stemmed from the federal prosecution of Charles Kokesh, who owned a firm that provided investment advice to business development companies. For more than a decade, Charles Kokesh misappropriated tens of millions from his company’s clients to fund a lavish lifestyle for himself while defrauding investors out of their funds. He was ultimately convicted and ordered to pay a civil penalty, but due to time limitations imposed by the courts, he only had to repay $5 million out of a total of $35 million in stolen funds. 

In the two years since the 2017 ruling, the SEC estimates that the five-year statute of limitations has allowed those who have committed securities fraud to keep over $1 billion of their ill-gotten gains. According to the SEC’s 2018 annual report, the Kokesh ruling may have caused the SEC to forgo up to $900 million in disgorgement in 2018 alone.

The Supreme Court has recently agreed to hear a case challenging the SEC’s ability to seek disgorgement. This case, , is expected to be heard in Spring 2020.

Media:

• Sponsoring Rep. Ben McAdams (D-UT) Press Release
  
• SIFMA Statement (Opposed)
  
• SIFMA Letter (Opposed)
  
• Financial Advisor (FA)
  
• Buckley