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  • FTC asks Supreme Court to delay review of $1.3 billion judgment

    Courts

    On December 13, the FTC filed a brief in a U.S. Supreme Court action that is currently awaiting the Court’s decision to grant certiorari. The question presented to the Court asks whether the FTC is empowered by Section 13(b) of the FTC Act to demand equitable monetary relief in civil enforcement actions. The petitioners, who include a Kansas-based operation and its owner, filed the petition for a writ of certiorari in October, appealing a December 2018 decision by the U.S. Court of Appeals for the Ninth Circuit (covered by InfoBytes here), which upheld a $1.3 billion judgment against the petitioners for allegedly operating a deceptive payday lending scheme. Among other things, the 9th Circuit rejected the petitioners’ argument that the FTC Act only allows the court to issue injunctions, concluding that a district court may grant any ancillary relief under the FTC Act, including restitution. The 9th Circuit also rejected the petitioners’ request to revisit those precedents in light of the Court’s 2017 holding in Kokesh v. SEC—which limited the SEC’s disgorgement power to a five-year statute of limitations period applicable to penalties and fines under 28 U.S.C. § 2462 (previously covered by InfoBytes here)—concluding that the district court did not abuse its discretion in calculating the award. Additionally, the 9th Circuit referenced the Court’s statement in Kokesh that noted “[n]othing in [its] opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings.”

    In response to the petition, the FTC asked the Court to delay reviewing the appeal, stating that the Court should hold the petition pending the disposition in a matter that was recently granted cert “to decide whether district courts may award disgorgement to the [SEC] under analogous provisions of the securities laws.” The FTC acknowledged that while the “relevant statutory schemes are not identical, and the FTC’s and the SEC’s authority to seek monetary relief will not necessarily rise and fall together,” the questions presented in both cases overlap.

    Courts Appellate Ninth Circuit U.S. Supreme Court FTC SEC Disgorgement FTC Act Liu v. SEC

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  • 10th Circuit affirms $5 million disgorgement in Kokesh

    Courts

    On December 6, the U.S. Court of Appeals for the Tenth Circuit affirmed a district court’s revised disgorgement order in SEC v. Kokesh. As previously covered by InfoBytes, in 2017, the U.S. Supreme Court handed down a unanimous ruling in Kokesh and rejected the SEC’s position that disgorgement is an equitable remedy and not a penalty. The Court’s decision limited the SEC’s disgorgement power to a five-year statute of limitations period applicable to penalties and fines under 28 U.S.C. § 2462. Following the Court’s ruling, in 2018, the 10th Circuit, on remand, directed the district court to enter an order for a lower disgorgement amount of $5 million (from nearly $35 million), holding that only a portion of the SEC’s claims were not time-barred by 28 U.S.C. § 2462. At the district court, the SEC also argued that prejudgment interest of more than $2.6 million should apply to the disgorgement penalty, as well as nearly $2.3 million in civil penalties, and the district court awarded such amounts, rejecting Kokesh’s argument that “the district court should reject any relief other than an order of disgorgement.” Kokesh again appealed, arguing, among other things, that “§ 2462 is jurisdictional and precludes this action in its entirety,” and that the permanent injunction and civil penalties were invalid.

    On appeal, the 10th Circuit refused to address Kokesh’s jurisdictional argument, stating that, among other things, the appellate court had previously found that “each act of misappropriation should be considered separately” and that not all of the SEC’s claims were time-barred. The appellate court further concluded that because it had previously found that some alleged misappropriations happened within the five-year limit, the $5 million disgorgement calculation that the SEC requested was warranted. Moreover, the appellate court noted that Kokesh failed to show any reason that its 2018 decision was “clearly erroneous,” and during remand, “rather than. . .contesting timeliness or the SEC’s calculations, Kokesh conceded the district court should enter the disgorgement order and instead focused on the SEC’s new request for prejudgment interest.” Additionally, the appellate court refused to consider Kokesh’s challenges to the permanent injunction and the civil penalty ordered because they were first raised in Kokesh’s reply brief.

    Courts Appellate Tenth Circuit U.S. Supreme Court SEC Disgorgement

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  • House passes bill to let SEC go back 14 years on disgorgement

    Federal Issues

    On November 18, the U.S. House passed the Investor Protection and Capital Markets Fairness Act (H.R. 4344) by a vote of 314-95. The bill, which was received in the Senate, would overturn the U.S. Supreme Court’s 2017 decision in Kokesh v. SEC, which limits the SEC’s disgorgement power and subjects the agency to the five-year statute of limitations applicable to penalties and fines. (Previously covered by InfoBytes here.) As discussed in a recent Buckley article, in Kokesh’s wake, H.R. 4344 would amend the Securities Exchange Act of 1934 by specifically authorizing the SEC to seek disgorgement and restitution, putting to rest the threshold question of whether the SEC has the authority to seek disgorgement. Notably, on November 1, the Court granted certiorari in Liu v. SEC to answer this very question. If signed into the law, H.R. 4344 would allow the SEC 14 years to pursue disgorgement in federal court under the statute of limitations.

    Federal Issues U.S. House SEC Federal Legislation Disgorgement U.S. Supreme Court Liu v. SEC

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  • SEC issues administrative order against U.S.-based global investment management firm

    Financial Crimes

    On August 27, the SEC issued an administrative order settling allegations against a U.S.-based investment management firm, which remained outstanding after the company’s June 4 NPA with the DOJ. The June 4 NPA resolved claims of FCPA violations in Libya and included a criminal penalty of $32.6 million and disgorgement of $31.6 million (see prior FCPA Scorecard coverage here). The SEC order stated that the company’s actions were in violation of the internal accounting controls provision of the Securities Exchange Act of 1934. The SEC settlement did not include a separate penalty beyond the disgorgement already agreed to in June, and pre-judgment interest. 

    Financial Crimes FCPA DOJ Disgorgement SEC

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  • Barbadian insurance company receives first declination with disgorgement under FCPA corporate enforcement policy

    Financial Crimes

    On August 23, a Barbadian insurance company received the first declination with disgorgement from the DOJ under the FCPA Corporate Enforcement Policy, which was made effective in November 2017. The conduct at issue involved payments made by the company to a Barbadian official in exchange for insurance contracts. The DOJ stated that the official, who is a U.S. legal permanent resident, laundered the payments through a New York-based company owned by a friend of the official. The declination was offered in consideration of numerous factors, including the company’s timely and voluntary disclosure of the conduct, its thorough internal investigation and cooperation with the DOJ’s investigation, its agreement to disgorge $93,900 in profits, and its efforts to enhance compliance and to remediate the matter by terminating all involved in the misconduct.

    Financial Crimes DOJ Bribery FCPA Disgorgement

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  • International oil field service company agrees to settle FCPA claim for $29 million in disgorgement and penalties

    Financial Crimes

    An international oil field service company recently settled allegations that the company improperly steered business to the friend of an Angolan official in exchange for that official awarding various oil contracts to the company. In total, the company agreed to pay the SEC $29.2 million, comprising $14 million in disgorgement, $1.2 million in prejudgment interest, and a $14 million penalty. The company’s former vice president also agreed to pay the SEC a $75,000 penalty related to these violations and other accounting irregularities.  

    This is the most recent settlement in a series of FCPA enforcement actions focusing on the company’s procurement processes and operations in various countries. A former subsidiary of the company settled similar FCPA allegations in 2009 related to alleged bribes paid to Nigerian officials to procure contracts in that country.    

    This settlement also highlights the role of whistleblowers in driving FCPA and other enforcement actions. A whistleblower employed by the company first alerted the company to potential FCPA issues in 2010, which resulted in the launching of an investigation into the allegations.

    Financial Crimes FCPA SEC Disgorgement Bribery Whistleblower

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  • Judge Issues Ruling that Federal Safe Harbor Provision Applies in RESPA Case

    Courts

    On July 13, a federal judge in the U.S. District Court for the Western District of Kentucky issued an opinion holding that a safe harbor provision for affiliated business arrangements under Section 8(c)(4) of RESPA protects a Louisville law firm's relationship with a string of now-closed title insurance agencies. (See CFPB v. Borders and Borders, Plc, No. 3:13-cv-01047-CRS-DW (W.D. Ky. July 13, 2017)). In 2013, the CFPB alleged the firm violated RESPA by paying kickbacks for real estate settlement referrals through a network of joint ventures with the principals of nine title insurance companies. (See previous InfoBytes summary here.) The judge granted the firm’s motion for summary judgment on only one safe harbor question, stating that the firm’s agreements with the title insurance agencies qualified as “affiliated business arrangements” because it “disclosed the relationship…, the customers could reject the referral, and the Bureau failed to show that the [title insurance companies] received anything of value beyond their ownership interests.”

    The judge rejected the firm's claim that the CFPB cannot seek disgorgement as a remedy and further declined to address the firm’s ultra vires argument that the CFPB is an unconstitutional agency and therefore lacks legal authority to bring suit, stating that the en banc decision in PHH Corp. v. CFPB has not yet been issued.

    Notably, however, the judge appeared to suggest that case could be appealed because the firm’s other arguments fail to qualify for RESPA safe harbors under Sections 8(c)(1) and 8(c)(2).

    Courts CFPB RESPA Mortgages Litigation Disgorgement Safe Harbor Single-Director Structure

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  • Attorney General Sessions Issues Memorandum Ending Payments to Third-Party Organizations as Part of Future Settlement Agreements

    Courts

    On June 7, Attorney General Jeff Sessions issued a memorandum entitled “Prohibition on Settlement Payments to Third Parties” instructing the Department of Justice (DOJ) to cease entering into settlement agreements that include payments to third-party organizations. Attorney General Sessions stated in a press release released by the DOJ, “[w]hen the federal government settles a case against a corporate wrongdoer, any settlement funds should go first to the victims and then to the American people—not to bankroll third-party special interest groups or the political friends of whoever is in power.”

    Summary of Memorandum. The memorandum, which became effective immediately and applies to future settlements, notes that previous settlement agreements involving the DOJ required “payments to various non-governmental, third-party organizations . . . [that] were neither victims nor parties to the lawsuits.” The memorandum now states that DOJ “attorneys may not enter into any agreement on behalf of the United States in settlement of federal claims or charges . . . that directs or provides for a payment or loan to any non-governmental person or entity that is not a party to the dispute.” The following are “limited” exceptions:

    • “the policy does not apply to an otherwise lawful payment or loan that provides restitution to a victim or that otherwise directly remedies the harm that is sought to be redressed, including, for example, harm to the environment or from official corruption”;
    • “the policy does not apply to payments for legal or other professional services rendered in connection with the case”; and
    • “the policy does not apply to payments expressly authorized by statute, including restitution and forfeiture.”

    The memorandum states that it applies to “all civil and criminal cases litigated under the direction of the Attorney General and includes civil settlement agreements, cy pres agreements or provisions, plea agreements, non-prosecution agreements, and deferred prosecution agreements.”

    Courts DOJ Securities SEC Disgorgement Appellate Litigation Settlement

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  • Supreme Court Rules Five-Year Statute of Limitations Applies to SEC Civil Penalties

    Courts

    In a unanimous ruling handed down on June 5, the United States Supreme Court held that the SEC is bound by a five-year statute of limitations on civil penalties or the return of illegal profits, citing 28 U.S.C. §2462 of the U.S. Code, which “establishes a [five-year] limitations period for ‘an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture.’” Justice Sotomayor delivered the opinion.

    The decision resolves a New Mexico case dating back to 2009, in which a jury found the defendant liable for misappropriating more than $34.9 million from 1995 through July 2007 from four SEC-registered investment companies under his control. See S.E.C. v. Kokesh, 834 F.3d 1158 (10th Cir. 2016). The district court judge ordered the defendant to pay a $2.4 million civil penalty, nearly $35 million in disgorgement, and more than $18 million in prejudgment interest after finding that §2462 did not apply because “disgorgement” is not a penalty within the meaning of the statute. The defendant appealed the ruling on the grounds that the disgorgement should be set aside because the claims accrued more than five years before the SEC brought its action against him and are consequently barred under the five-year statute of limitations. However, the 10th Circuit affirmed the ruling of the lower court, agreeing that disgorgement was not a penalty.

    The Supreme Court reversed. Justice Sotomayor explained why the Court disagreed with the 10th Circuit panel’s conclusion that disgorgement was not a penalty under the statute. The Court held that disgorgement “bears all the hallmarks of a penalty” and “is imposed as a consequence of violating a public law and . . . is intended to deter, not to compensate.” Consequently, disgorgement represents a penalty, thus falling within the five-year statute of limitations of §2462.

    Courts Securities SEC Disgorgement Appellate Litigation U.S. Supreme Court

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