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The SEC’s New Challenge: Faster Investigations

Supreme Court ruled the SEC has five years to file a claim for disgorgement in securities violation cases.

The Securities and Exchange Commission will have only five years to file a claim for disgorgement, or the repayment of funds gained through illegal means, in its future investigations of violations of securities laws, the Supreme Court has decided.

In Kokesh v. Securities and Exchange Commission, a unanimous Supreme Court ruled June 5 that a claim for disgorgement is considered a penalty because it can sometimes exceed the original amount that was gained, and serve as a punishment to a wrongdoer. As a penalty, disgorgement will be subject to a five-year statute of limitation.

Since the SEC previously did not have a time limitation, and could pursue cases even decades old, the ruling has significant ramifications on future insider trading cases, according to Jeffrey Cramer, a former federal prosecutor and current managing director at consulting firm Berkeley Research Group. The disgorgement of ill-gotten gains is often used to pay back victims of fraud, and some of the funds may go to the U.S. Treasury, he said.

“If someone is good at concealing their scheme for more than five years, that money stays in his pocket,” said Cramer. “Institutional investors need to hope the SEC can quicken their investigations.”

One of the SEC’s most high-profile insider trading cases was resolved in just under five years, illustrating that the federal regulator is capable of investigating and bringing charges within the new time limitation decided by the Supreme Court. In March 2013, the SEC settled with advisory firm CR Intrinsic, an affiliate of SAC Capital Advisors, the former hedge fund run by Steven Cohen, in a deal that involved disgorgement of nearly $275 million. The insider trading occurred in July 2008, according to the SEC complaint.

The SEC has argued disgorgement is “not punitive but a remedial sanction that operates to restore the status quo,” the Supreme Court noted in its opinion on Kokesh v. Securities and Exchange Commission. The case concerned investment advisor Charles Kokesh, who the SEC accused in 2009 of misappropriating $34.9 million from four business development companies dating as far back as 1995. The SEC sought disgorgement of the $34.9 million.

Judith Burns, a spokeswoman for the SEC, declined to comment on the court’s decision.

While the Department of Justice, which often works alongside the SEC to bring criminal charges against insider traders, already operated under a five-year statute of limitations, “the SEC had the luxury of bringing cases at a slower pace than the DOJ,” Cramer said.

In addition to reworking and hastening how they pursue securities violations cases, the SEC can look for evidence of continuing cover-up, such as a fund manager who writes false investor letters. This evidence would allow them to work around the statute of limitation, Cramer said, a strategy the DOJ already uses.

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