The justices are likely to refrain from dealing with the Jalbert case until they issue an opinion in Liu v. SEC, which is expected by the end of June.
The Supreme Court has once again been asked to determine if the SEC’s disgorgement authority runs afoul of federal statutes or other constitutional provisions. Jalbert’s petition, however, will likely be held by the justices pending the outcome of Liu v. SEC, which presents a similar question and was argued in March 2020. An opinion in Liu is expected by the end of the current term in June. Even if the justices were to rule against the SEC in Liu, Congress could advance legislation that has already been introduced to clarify the SEC’s and courts’ authority regarding disgorgement (See the discussion below regarding merits stage briefing in Liu) (Jalbert v. SEC, May 18, 2020).
Jalbert petition must overcome waiver. F-Squared Investments, Inc. settled the SEC's fraud charges in December 2014 and admitted key findings. The SEC had alleged that F-Squared advertised its AlphaSector product using flawed data that suggested the possibility of outsized returns. Alpha Sector employed a sector-specific, algorithmically-driven method for choosing which equity ETFs would be included in the Alpha Sector portfolio (i.e., a sector rotation strategy). The settlement considered F-Squared's remedial acts while also imposing various undertakings. With respect to penalties, F-Squared was censured, required to pay a civil money penalty of $5 million, and ordered to pay disgorgement of $30 million, the latter item being the subject of the trustee's district court suit.
The SEC would later oppose efforts by the trustee for F-Squared (F2 Liquidating Trust) to reopen the case in order to assert that Kokesh barred the imposition by the SEC of a disgorgement order on F-Squared. The First Circuit rebuffed the trustee in December 2019 and held that any claims about the disgorgement order had been waived when F-Squared settled with the SEC.
The trustee’s petition for certiorari argued that the SEC usurped the legislative power possessed only by Congress to create penalties. According to the petition, the existing Congressional remedial scheme under which the SEC operates disallows the imposition of penalties. Here, the trustee argued that the disgorgement imposed on F-Squared amounted to a penalty because it went to the Treasury instead of to fraud victims and it had the purposes of punishing or deterring conduct or, in other words, it met the definition of a penalty under Kokesh. However, the trustee’s petition said in a footnote that it was not suggesting that the SEC can never impose disgorgement, but only that the manner in which the SEC imposed disgorgement in this case amounted to an unconstitutional penalty.
Defendants line up to take on SEC. In Kokesh, the Supreme Court determined that disgorgement is a penalty within the meaning of 28 U.S.C. §2462 for purposes of that statute’s limitations period. The court, however, left open the question of whether the SEC has authority to seek, and federal courts to grant, disgorgement.
The Jalbert case is not the first to raise the open questions from Kokesh. These cases all pose essentially the same question about SEC authority, although with some nuances. Below are the questions presented by the petitioners in the several cases in the OT19 term regarding the scope of Kokesh that are now pending before the Supreme Court:
- Liu v. SEC—Whether the Securities and Exchange Commission may seek and obtain disgorgement from a court as "equitable relief" for a securities law violation even though this Court has determined that such disgorgement is a penalty.
- Gentile v. SEC—Does the five-year statute of limitations in 28 U.S.C. §2462 apply to "obey the law" injunctions and penny stock industry bars pursuant to 15 U.S.C. §78u(d)(1), (6)?
- Team Resources v. SEC—Whether the Securities and Exchange Commission may obtain disgorgement from a federal court as an equitable remedy for securities violations despite this Court’s determination that disgorgement is a penalty.
- Jalbert v. SEC—Whether a federal government agency’s order imposing unauthorized penalties labeled "disgorgement" is void in relevant respects because the agency did not have the power to impose penalties without explicit congressional authorization (the petition separately styles the same question in terms of a separation of powers violation).
The merits stage briefing in Liu featured Liu’s and the government’s different takes on what equitable powers mean under federal securities laws. Liu argued that the SEC’s powers are more confined, while the government argued that the power to enjoin includes disgorgement and that many federal statutes permit disgorgement. The Supreme Court heard oral arguments in Liu in March 2020.
There does exist the potential for legislative reversal of a decision against the SEC in Liu, although the House and Senate would have to resolve differences between their respective disgorgement bills. The House version would allow a 14 year limitations period on disgorgement, while the Senate version retains the 5-year limitations period in 28 U.S.C. §2462. Moreover, the Senate version would grant the SEC authority to seek restitution in addition to disgorgement; the House version does not mention restitution. The House overwhelmingly passed its version in November 2019, but the Senate version remains in committee (see the above linked story on merits stage briefing in Liu for more details on the legislative proposals).
The Supreme Court declined to hear the Gentile case in April 2020. The case involved charges by the SEC that Guy Gentile manipulated the stocks of two companies in the mining and energy industries. Gentile had asked the justices to find that the SEC’s authority to seek obey the law injunctions and penny stock bars, which are authorized under Exchange Act Sections 21(d)(1) and 21(d)(6), violated 28 U.S.C. § 2462. The government’s response had argued that an injunction is not a penalty because it targets future conduct rather than penalizing past conduct. The government also had objected that the interlocutory nature of the case made it a poor vehicle to address the open questions in Kokesh.
In Team Resources, The SEC charged the company and individuals with marketing unregistered oil and gas limited partnership interests that boasted production and returns on investment "far beyond what could reasonably be expected" (Litigation Release No. 23230, April 6, 2015; SEC complaint). Kokesh was decided while the Team Resources case was pending in the lower federal courts. According to Team Resources’s petition for certiorari, Team Resources had agreed to settle the SEC’s charges but reserved the right to dispute the amount of disgorgement or of any civil penalties. The government in Team Resources agreed with the company that the Supreme Court should hold the petition pending the outcome in Liu.
The case is No. 19-1310.
Attorneys: Alex Lipman (Lipman Law PLLC) for Craig R. Jalbert. Noel J. Francisco, U.S. Department of Justice, for the SEC.
Companies: F2 Liquidating Trust; F-Squared Investments, Inc.
MainStory: TopStory Enforcement FedTracker Securities FraudManipulation GCNNews SupremeCtNews
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