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  • CFPB sues co-trustees for concealing assets to avoid fine

    Federal Issues

    On April 5, the CFPB filed a complaint against two individuals, both individually and in their roles as co-trustees of two trusts, accusing them of concealing assets to avoid paying a fine owed to the Bureau. In 2015 the Bureau filed an administrative action alleging one of the co-trustees—the former president of a Delaware-based online payday lender (the “individual defendant”)—and the lender violated TILA and EFTA and engaged in unfair or deceptive acts or practices when making short-term loans. (Covered by InfoBytes here.) The Bureau’s administrative order required the payment of more than $38 million in both legal and equitable restitution, along with $7.5 million in civil penalties for the company and $5 million in civil penalties for the individual defendant.

    As previously covered by InfoBytes, two different administrative law judges (ALJs) decided the present case years apart, with their recommendations separately appealed to the Bureau’s director. The director upheld the decision by the second ALJ and ordered the lender and the individual defendant to pay the restitution. A district court issued a final order upholding the award, which was appealed on the grounds that the enforcement action violated their due process rights by denying the individual defendant additional discovery concerning the statute of limitations. The lender and the individual defendant recently filed a petition for writ of certiorari challenging the U.S. Court of Appeals for the Tenth Circuit’s affirmation of the CFPB administrative ruling, and asked the U.S. Supreme Court to review whether the high court’s ruling in Lucia v. SEC, which “instructed that an agency must hold a ‘new hearing’ before a new and properly appointed official in order to cure an Appointments Clause violation” (covered by InfoBytes here), meant that a CFPB ALJ could “conduct a cold review of the paper record of the first, tainted hearing, without any additional discovery or new testimony,” or whether the Court intended for the agency to actually conduct a new hearing.

    The Bureau claimed in its announcement that to date, the defendants have not complied with the agency’s order, nor have they obtained a stay while their appeal was pending. The defendants have also made no payments to satisfy the judgment, the Bureau said. The complaint alleges that the co-trustee defendants transferred funds to hinder, delay, or defraud the Bureau, in violation of the FDCPA, in order to avoid paying the owed restitution and penalties. Specifically, the complaint alleges that between 2013 and 2015, after becoming aware of the Bureau’s investigation, the individual defendant transferred $12.3 million to his wife through their revocable trusts, for which his wife is the beneficiary. The complaint requests a declaration that the transactions were fraudulent, seeks to recover the value of the transferred assets via liens on the property in partial satisfaction of the Bureau’s judgment against the individual defendant, and seeks a monetary judgment against the wife and her trust for the value of the respective property and/or funds received as a transferee of fraudulent conveyances of the property belonging to the individual defendant.

    Federal Issues Courts CFPB Enforcement U.S. Supreme Court Online Lending Payday Lending FDCPA Appellate Tenth Circuit

  • Online lender asks Supreme Court to review ALJ ruling

    Courts

    A Delaware-based online payday lender and its founder and CEO (collectively, “petitioners”) recently submitted a petition for a writ of certiorari challenging the U.S. Court of Appeals for the Tenth Circuit’s affirmation of a CFPB administrative ruling related to alleged violations of the Consumer Financial Protection Act (CFPA), TILA, and EFTA. The petitioners asked the Court to first review whether the high court’s ruling in Lucia v. SEC, which “instructed that an agency must hold a ‘new hearing’ before a new and properly appointed official in order to cure an Appointments Clause violation” (covered by InfoBytes here), meant that a CFPB administrative law judge (ALJ) could “conduct a cold review of the paper record of the first, tainted hearing, without any additional discovery or new testimony.” Or, the petitioners asked, did the Court intend for the agency to actually conduct a new hearing. The petitioners also asked the Court to consider whether an agency funding structure that circumvents the Constitution’s Appropriations Clause violates the separation of powers so as to invalidate prior agency actions promulgated at a time when the Bureau was receiving such funding.

    The case involves a challenge to a 2015 administrative action that alleged the petitioners engaged in unfair or deceptive acts or practices when making short-term loans (covered by InfoBytes here). The Bureau’s order required the petitioners to pay $38.4 million as both legal and equitable restitution, along with $8.1 million in penalties for the company and $5.4 million in penalties for the CEO. As previously covered by InfoBytes, between 2018 and 2021, the Court issued four decisions, including Lucia, which “bore on the Bureau’s enforcement activity in this case” by “deciding fundamental issues related to the Bureau’s constitutional authority to act” and appoint ALJs. During this time, two different ALJs decided the present case years apart, with their recommendations separately appealed to the Bureau’s director. The director upheld the decision by the second ALJ and ordered the lender and its owner to pay the restitution. A district court issued a final order upholding the award, which the petitioners appealed, arguing, among other things, that the enforcement action violated their due-process rights by denying the CEO additional discovery concerning the statute of limitations. The petitioners claimed that they were entitled to a “new hearing” under Lucia, and that the second administrative hearing did not rise to the level of due process prescribed in that case. 

    However, the 10th Circuit affirmed the district court’s $38.4 million restitution award, rejecting the petitioners’ various challenges and affirming the director’s order. The 10th Circuit determined that there was “no support for a bright-line rule against de novo review of a previous administrative hearing,” nor did it see a reason for a more extensive hearing. Moreover, the petitioners “had a full opportunity to present their case in the first proceeding,” the 10th Circuit wrote.

    The petitioners maintained that “[d]espite the Court’s clear instruction to hold a ‘new hearing,’ ALJs and courts have reached divergent conclusions as to what Lucia requires, expressing confusion and frustration regarding the lack of guidance.” What it means to hold a “new hearing” runs “the gamut,” the petitioners wrote, pointing out that while some ALJs perform a full redo of the proceedings, others merely accept a prior decision based on a cold review of the paper record. The petitioners argued that they should have been provided a true de novo hearing with an opportunity for new testimony, evidence, discovery, and legal arguments. The rehearing from the new ALJ was little more than a perfunctory “paper review,” the petitioners wrote.

    Petitioners asked the Court to grant the petition for three reasons: (i) “the scope of Lucia’s ‘new hearing’ remedy is an important and apparently unsettled question of federal law”; (ii) “the notion Lucia does not require a genuinely ‘new’ de novo proceeding is necessarily wrong because a sham ‘remedy’ provides parties no incentive to litigate Appointments Clause challenges”; and (iii) the case “is an ideal vehicle to provide guidance on Lucia’s ‘new hearing’ remedy.” The petitioners further argued that “Lucia’s remedy should provide parties an incentive to raise separation of powers arguments by providing them actual and meaningful relief.”

    The petitioners’ second question involves whether Appropriations Clause violations that render an agency’s funding structure unconstitutional, if upheld, invalidate agency actions taken under such a structure. The petitioners called this “an important, unsettled question of federal law meriting the Court’s review,” citing splits between the Circuits over the constitutionality of the Bureau’s funding structure which has resulted in uncertainty for both regulators and regulated parties. Recently, the Court granted the Bureau’s request to review the 5th Circuit’s decision in CFSAA v. CFPB, which held that Congress violated the Appropriations Clause when it created what the 5th Circuit described as a “perpetual self-directed, double-insulated funding structure” for the agency (covered by InfoBytes here).

    Courts CFPB U.S. Supreme Court Online Lending Payday Lending Appellate Tenth Circuit Fifth Circuit TILA EFTA CFPA UDAAP Enforcement Constitution Funding Structure ALJ

  • 10th Circuit: Vendor knowledge of consumer debt is not a public disclosure

    Courts

    On December 16, the U.S. Court of Appeals for the Tenth Circuit affirmed a lower court’s dismissal of an FDCPA suit. According to the opinion, the plaintiff, who had student loan debt, received a collection letter from the defendant that listed the assigned balance as $184,580.73 and the debt balance as $217,657.60 without explaining the difference or that the debt could increase due to interest, fees, and other charges. The defendant, who used an outside mailer to compose and send the letters, sent her two more letters without providing an explanation for the balances. The plaintiff sued, alleging the defendant violated the FDCPA by communicating information about the debt to a vendor that printed and mailed the letters. According to the plaintiff, communicating this information violated FDCPA provisions that prohibit debt collectors from communicating with, in connection with the collection of any debt, any person without the consumer’s consent or court permission. The plaintiff also claimed that the defendant violated the FDCPA by misrepresenting the amount of the debt because it did not indicate that the amount of the debt may increase.

    On the appeal, the appellate court affirmed dismissal after it found that the plaintiff lacked standing since neither of the plaintiff’s claims caused a concrete injury. First, the appellate court found that one private entity knowing about the plaintiff’s debt is not a public disclosure of private facts, which does not rise to the level of sustaining a concrete injury needed to sue in federal court. Second, regarding the substance of the letters, the appellate court noted that the plaintiff simply claimed that the letters she received caused her to be confused and to believe the debt was not accruing interest. However, the appellate court found that “confusion and misunderstanding are insufficient to confer standing.”

    Courts Tenth Circuit Appellate FDCPA Student Lending Debt Collection Consumer Finance

  • 10th Circuit: Payday lender must pay $38.4 million restitution order

    Courts

    On September 15, the U.S. Court of Appeals for the Tenth Circuit affirmed the CFPB’s administrative ruling against a Delaware-based online payday lender and its founder and CEO (respondents/petitioners) regarding a 2015 administrative enforcement action that alleged violations of the Consumer Financial Protection Act (CFPA), TILA, and EFTA. As previously covered by InfoBytes, in 2015, the CFPB announced an action against the respondents for alleged violations of TILA and the EFTA, and for engaging in unfair or deceptive acts or practices. Specifically, the CFPB alleged that, from May 2008 through December 2012, the online lender (i) continued to debit borrowers’ accounts using remotely created checks after consumers revoked the lender’s authorization to do so; (ii) required consumers to repay loans via pre-authorized electronic fund transfers; and (iii) deceived consumers about the cost of short-term loans by providing them with contracts that contained disclosures based on repaying the loan in one payment, while the default terms called for multiple rollovers and additional finance charges. The order required the respondents to pay $38.4 million as both legal and equitable restitution, along with $8.1 million in penalties for the company and $5.4 million in penalties for the CEO.

    According to the opinion, between 2018 and 2021, the U.S. Supreme Court issued four decisions, Lucia v. SEC (covered by InfoBytes here), Seila Law v. CFPB (covered by a Buckley Special Alert here), Liu v. SEC (covered by InfoBytes here), and Collins v. Yellen (covered by InfoBytes here), which “bore on the Bureau’s enforcement activity in this case,” by “decid[ing] fundamental issues such as the Bureau’s constitutional authority to act and the appointment of its administrative law judges (‘ALJ’).” The decisions led to intermittent delays and restarts in the Bureau’s case against the petitioners. For instance, the opinion noted that two different ALJs decided the present case years apart, with their recommendations separately appealed to the Bureau’s director. The CFPB’s director upheld the decision by the second ALJ and ordered the lender and its owner to pay the restitution, and a district court issued a final order upholding the award. The petitioners appealed.

    On appeal, the petitioners made three substantive arguments for dismissing the director’s final order. The petitioners argued that under Seila, the CFPB’s structure was unconstitutional and therefore the agency did not have authority to issue the order. The appellate court disagreed, stating that it is “to use a ‘scalpel rather than a bulldozer’ in remedying a constitutional defect,” and that “because the Director’s actions weren’t unconstitutional, we reject Petitioners’ argument to set aside the Bureau’s enforcement action in its entirety.”

    The petitioners also argued that the enforcement action violated their due-process rights by denying the CEO additional discovery concerning the statute of limitations. The petitioners claimed that they were entitled to a “new hearing” under Lucia, and that the second administrative hearing did not rise to the level of due process prescribed in that case. The appellate court determined that there was “no support for a bright-line rule against de novo review of a previous administrative hearing," nor did it see a reason for a more extensive hearing. Moreover, the petitioners “had a full opportunity to present their case in the first proceeding,” the 10th Circuit wrote. The appellate court further rejected the company’s argument regarding various evidentiary rulings, including permitting evidence about the company’s operational expenses, among other things. The appellate court also concluded that the CFPA’s statute of limitations commences when the Bureau either knows of a violation or, through reasonable diligence, would have discovered the violation. Therefore, the appellate court rejected the argument “that the receipt of consumer complaints triggered the statute of limitations.”

    The petitioners also challenged the remedies order, claiming they were not allowed “to present evidence of their good-faith reliance on counsel (as to restitution and civil penalties) and evidence of their expenses (as to the Director’s residual disgorgement order).” The appellate court rejected that challenge, holding that the director properly considered all factors, including good faith, and rejected the petitioners’ challenge to the ALJ’s recommended civil penalties.

    The 10th Circuit affirmed the district court’s order of a $38.4 million restitution award, rejecting the petitioners’ various challenges and affirming the director’s order.

    Courts Appellate Tenth Circuit CFPB TILA EFTA Disclosures CFPA UDAAP Enforcement U.S. Supreme Court Payday Lending

  • 10th Circuit says materiality is determined through the perspective of the “reasonable consumer”

    Courts

    On August 8, the U.S. Court of Appeals for the Tenth Circuit upheld the dismissal of an FDCPA action, concluding that an alleged false or misleading communication must be material in order to be considered a violation of the statute, and that materiality is determined through the perspective of the “reasonable consumer.” The plaintiff, a student loan debtor, alleged that he received a letter attempting to collect on debt from the defendant. The defaulted debt in question had been sold to a federal student-loan guaranty agency (creditor), which contracted with the defendant to collect the debt. According to the plaintiff, the letter appeared as if it were sent by the creditor, primarily because the letter displayed the guaranty agency’s name and logo instead of the defendant’s own information. According to the plaintiff, the letter violated several sections of the FDCPA, which prohibit the use of false representations or deceptive means to collect a debt or obtain information concerning a consumer and require a debt collector to use their “true name.” The district court dismissed the action for failure to state a claim, ruling that the letter in question was not misleading and that the plaintiff failed to establish that the defendant used materially misleading, unfair, or unconscionable means to collect the debt.

    On appeal, the 10th Circuit held that “a reasonable consumer would not be misled,” because the letter (i) identifies the creditor as “the holder of a defaulted federally insured student loan”; (ii) states that the letter “is an attempt, by a debt collector, to collect a debt”; and (iii) clarifies that the defendant “is assisting [the creditor] with administrative activities associated with this administrative wage garnishment.” Moreover, “[e]ven assuming a reasonable consumer would believe [the creditor] and not [the defendant] sent the letter, [the plaintiff] fails to demonstrate how that would frustrate the reasonable consumer’s ability to respond intelligently,” the appellate court wrote.

    In its determination, the 10th Circuit also considered differences related to the “least sophisticated consumer” and a “reasonable consumer” in determining how materiality should be measured. According to the appellate court, even the courts that apply the least sophisticated consumer standard tend to agree that the consumer’s interpretation must be reasonable, thereby incorporating aspects of the reasonable consumer standard. The 10th Circuit pointed out that while many courts have referenced the “least sophisticated consumer” in their rulings, few actually use that perspective. “In applying the least sophisticated consumer standard, courts typically begin by noting the least sophisticated consumer is not an expert but then quickly explain he is not actually the least sophisticated consumer,” the 10th Circuit said, adding that “[i]n reality, the nebulous least sophisticated consumer standard is simply a misnomer. A few circuits, recognizing problems with the least sophisticated consumer standard, instead look to the ‘unsophisticated consumer.’” The appellate court concluded that, assuming “the reasonable consumer would read a communication in its entirety and make sense of a communication by assessing it as a whole and in its context,” no reasonable consumer would have been materially misled.

    Courts Appellate FDCPA Debt Collection Tenth Circuit Consumer Finance

  • 10th Circuit: Extended overdraft fees do not qualify as interest under the NBA

    Courts

    On April 8, the U.S. Court of Appeals for the Tenth Circuit concluded that extended overdraft fees do not legally qualify as interest under the National Bank Act (NBA). According to the opinion, after the plaintiff overdrew funds from his checking account, the bank covered the cost of the item and charged an initial overdraft fee. The bank later began imposing an extended overdraft fee each business day following the initial overdraft, ultimately assessing 36 separate overdraft fees. The plaintiff filed a putative class action, contending that the bank’s extended overdraft fees qualify as interest under the NBA, and that the amount charged (which he claimed translated to an effective annualized interest rate between 501 and 2,462 percent) violated the NBA’s anti-usury provisions because it exceeded Oklahoma’s maximum annualized interest rate of 6 percent. While the plaintiff recognized that the initial overdraft fee qualifies as a “deposit account service,” he argued that the extended overdraft fee “‘is an interest charge levied by [the bank] for the continued extension of credit made in covering a customer’s overdraft’ and therefore cannot be considered connected to the same banking services that [the bank] provides to its depositors.” The district court disagreed and dismissed the action for failure to state a claim after determining that the bank’s extended overdraft fees were fees for “deposit account services” and were not “interest” under the NBA.

    In affirming the district court’s dismissal, the appellate majority (an issue of first impression in the 10th Circuit) agreed that the fees qualify as non-interest account fees rather than interest charges under the NBA. The majority deferred to the OCC’s 2007 Interpretive Letter, which addressed the legality of a similar overdraft program fee structure. The letter “represents OCC’s reasonable interpretation of genuinely ambiguous regulations, and OCC’s determination that fees like [the bank’s] extended overdraft fees are ‘non-interest charges’ is neither plainly erroneous nor inconsistent with the regulations it interprets,” the majority wrote. “As ‘non-interest charges’ under § 7.4002, [the bank’s] extended overdraft fees are not subject to the NBA’s usury limits, and [plaintiff] fails to state a claim,” the majority added.

    The dissenting judge countered that extended overdraft fees are interest, and that the OCC’s interpretation did not deserve deference because these fees “unambiguously” meet the definition of interest under 12 C.F.R. § 7.4001(a). According to the dissenting judge, this regulation provides that “‘interest’ ... includes any payment compensating a creditor ... for an extension of credit,” and that as such, the “definition maps onto extended overdraft fees like [the bank’s]” and thus the plaintiff had stated a claim.

    Courts Appellate Tenth Circuit Overdraft Interest National Bank Act Fees Consumer Finance OCC Class Action

  • 10th Circuit affirms summary judgment in FDCPA action

    Courts

    On August 17, the U.S. Court of Appeals for the Tenth Circuit affirmed a district court’s decision in granting a plaintiff summary judgment, finding that the debt collector (defendant) violated the FDCPA by allegedly attempting to collect a debt despite receiving written notice disputing the debt, and by allegedly calling the defendant despite receiving a “cease-and-desist letter.” According to the opinion, the plaintiff allegedly incurred a medical debt that was placed with the defendant for collection, in which the defendant sent a letter on April 25 to the plaintiff seeking payment of the debt. On April 30, the defendant called the plaintiff and left a voice message. Subsequently, the defendant received a letter from the plaintiff on May 7 disputing the debt and demanding that the defendant cease calling, and that future correspondence should be in writing. However, the letter was not documented into the defendant’s system until May 10; meanwhile, on May 8, the defendant placed another call to the plaintiff, leaving another voice message. The plaintiff filed suit, alleging the defendant violated Section 1692g(b) of the FDCPA “by attempting to collect the debt despite receiving her written notice disputing the debt” and Section 1692g(c) of the FDCPA “by continuing to call her despite receiving her cease-and-desist letter.” The district court ruled that the plaintiff violated the FDCPA and the defendant’s bona fide error defense did not excuse the FDCPA violations, emphasizing that “the bona fide-error defense is an affirmative one, requiring that [the defendant] prove the prongs of the defense, not that [the plaintiff] disprove them.”

    On appeal, the 10th Circuit agreed with the district court and cited TransUnion v. Ramirez, where the U.S. Supreme Court clarified the Spokeo standing requirements, including that the tort of intrusion upon seclusion is recognized as an intangible harm providing a basis for a lawsuit in American courts (covered by InfoBytes here). According to the opinion, in consideration of the FCRA, “the TransUnion Court noted that a company’s maintaining incorrect information in its database, absent dissemination to a third party, failed to create a harm bearing a close relationship to the common-law tort of defamation.” Further, “[w]ithout the ‘necessary’ defamation component that the tortious words were published, this harm differed in kind.” The appellate court pointed out that “this analysis doesn’t control the case at question because the plaintiff alleged the necessary components for a common-law intrusion-upon-seclusion tort.” The appellate court further affirmed that the phone call that was placed after the cease-and-desist letter was received is considered enough to confer standing for the plaintiff to sue. The 10th Circuit held, “[t]hough a single phone call may not intrude to the degree required at common law, that phone call poses the same kind of harm recognized at common law—an unwanted intrusion into a plaintiff’s peace and quiet.”

    Courts Appellate FDCPA Debt Collection Tenth Circuit Spokeo

  • CFPB declines to stay $51 million order for online payday lender

    Federal Issues

    On March 9, the CFPB denied a request made by a Delaware online payday lender and its CEO (collectively, “respondents”) to stay a January 2021 final decision and order requiring the payment of approximately $51 million in restitution and civil money penalties, pending appellate review. As previously covered by InfoBytes, in 2015, the Bureau filed a notice of charges alleging the respondents (i) continued to debit borrowers’ accounts using remotely created checks after consumers revoked the lender’s authorization to do so; (ii) required consumers to repay loans via pre-authorized electronic fund transfers; and (iii) deceived consumers about the cost of short-term loans by providing them with contracts that contained disclosures based on repaying the loan in one payment, while the default terms called for multiple rollovers and additional finance charges. Former Director Kathy Kraninger issued the final decision and order in January, affirming an administrative law judge’s recommendation that the respondents’ actions violated TILA, EFTA, and the CFPA’s prohibition on unfair or deceptive acts or practices by, among other things, deceiving consumers about the costs of their online short-term loans.

    The Bureau’s March 9 administrative order determined that respondents (i) failed to show they have a substantial case on the merits with respect to their argument regarding ratification as an appropriate remedy for the respondents’ alleged constitutional violation; (ii) failed to show they “suffered irreparable harm” because the Bureau’s final decision does not infringe on the respondents’ constitutional rights and merely requires them to pay money into an escrow account; and (iii) failed to demonstrate that staying the final decision would not harm other parties and the public interest because the respondents might “dissipate assets during the pendency of further proceedings,” potentially impacting future consumer redress. The administrative order, however, granted a 30-day stay to allow respondents to seek a stay from the U.S. Court of Appeals for the Tenth Circuit.

    Federal Issues CFPB Online Lending Enforcement Payday Lending TILA EFTA CFPA Unfair Deceptive UDAAP Appellate Tenth Circuit

  • SEC files Supreme Court brief in favor of disgorgement

    Courts

    On January 15, the SEC filed a brief in a pending U.S. Supreme Court action, Liu v. SEC. The question presented to the Court asks whether the SEC, in a civil enforcement action in federal court, is authorized to seek disgorgement of money acquired through fraud. The petitioners were ordered by a California federal court to disgorge the money that they collected from investors for a cancer treatment center that was never built. The SEC charged the petitioners with funneling much of the investor money into their own personal accounts and sending the rest of the funds to marketing companies in China, in violation of the Securities Act’s prohibitions against using omissions or false statements to secure money when selling or offering securities. The district court granted the SEC’s motion for summary judgment, and ordered the petitioners to pay a civil penalty in addition to the $26.7 million the court ordered them to repay to the investors. The petitioners appealed to the Supreme Court and in November, the Court granted certiorari.

    The petitioners argued that Congress has never authorized the SEC to seek disgorgement in civil suits for securities fraud. They point to the court’s 2017 decision in Kokesh v. SEC, in which the Court reversed the ruling of the U.S. Court of Appeals for the Tenth Circuit when it unanimously held that disgorgement is a penalty and not an equitable remedy. Under 28 U.S.C. § 2462, this makes disgorgement subject to the same five year statute of limitations as are civil fines, penalties and forfeitures (see previous InfoBytes coverage here). The petitioners also suggested that the SEC has enforcement remedies other than disgorgement, such as injunctive relief and civil money penalties, so loss of disgorgement authority will not hinder the agency’s enforcement efforts.

    According to the SEC’s brief, historically, courts have used disgorgement to prevent unjust enrichment as an equitable remedy for depriving a defendant of ill-gotten gains. More recently, five statutes enacted by Congress since 1988 “show that Congress was aware of, relied on, and ratified the preexisting view that disgorgement was a permissible remedy in civil actions brought by the [SEC] to enforce the federal securities laws.” The agency notes that the Court has recognized disgorgement as both an equitable remedy and a penalty, suggesting, however, that “the punitive features of disgorgement do not remove it from the scope of [the Exchange Act’s] Section 21(d)(5).” Regarding the petitioner’s reliance on Kokesh, the brief explains that “the consequence of the Court’s decision was not to preclude or even to place special restrictions on SEC claims for disgorgement, but simply to ensure that such claims—like virtually all claims for retrospective monetary relief—must be brought within a period of time defined by statute.”

    In addition to the brief submitted by the SEC, several amicus briefs have been filed in support of the SEC, including a brief from several members of Congress, and a brief from the attorneys general of 23 states and the District of Columbia.

    Courts U.S. Supreme Court Disgorgement Kokesh SEC Securities Exchange Act Congress Amicus Brief State Attorney General Securities Writ of Certiorari Fraud Tenth Circuit Civil Fraud Actions Regulator Enforcement Civil Money Penalties Liu v. SEC

  • 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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