A bi-partisan proposal aims to help securities fraud victims be able to require some or all their losses.

A bi-partisan proposal , The Chair of the Securities and Exchange Commission, Jay Clayton, and the Chair of the Commodities Futures Trading Commission (CFTC), Chris Giancarlo, both appeared in front of the Senate Appropriations Committee in support of the two agencies’ budget requests.

Senator John Neely Kennedy, a Republican from the State of Louisiana, is the Chair of that committee.

In his five minutes to ask questions, he asked, “As you know, Mr. Chairman, Senator Warner and I have a bill that would allow the SEC to seek disgorgement as a remedy and would create a new authority for restitution for violations of securities laws. Tell me about the issue with respect to disgorgement and your ability to enforce the allow.” Kennedy asked.

Senator Warner is Mark Warner, a Democrat from the State of Virginia.

Clayton responded, “So, there was a recent Supreme Court case, where the Supreme Court said that our current authority with disgorgement has a five year statute of limitations.” Clayton responded.

The Supreme Court case that Clayton referred to is Kokesh Vs. SEC.

“The Court’s decision (discussed below) represents a clear limitation on the ability of the Securities and Exchange Commission (the SEC or Commission) to seek disgorgement in enforcement actions going forward, and it will likely have a significant impact. In 2016 alone, the SEC obtained disgorgement awards totaling approximately $2.8 billion, well in excess of the approximately $1.2 billion that the SEC secured in civil penalties.” According to an analysis by the law firm, Skadden Arps.

Among the implications, according to Skadden Arps analysis, was that there is now a five year statute of limitation from the time the crime was committed until the case can be brought.

“In a number of instances, that’s probably correct. Statutes of limitations have value, but there are some instances in particular: Ponzi schemes, well concealed frauds, where that type of statue limitations- and we have numbers that show this- impact our ability to get people their money back,” Clayton answered.

Clayton said a five year statute of limitations will reward “a well concealed fraud.”

In March 2019, Kennedy and Warner introduced the Securities Enforcement and Investor Compensation Act. The proposed bill would, among other things, increase the statute of limitations to ten years.

“On June 5, 2017, the Supreme Court in Kokesh v. Securities Exchange Commission ruled that the SEC only has five years to bring disgorgement claims against bad actors to try to compensate harmed Main Street investors.” A press release noted. “Although the SEC strives to bring cases as soon as possible, sometimes well-concealed frauds are not discovered for many years. (As an example, Bernie Madoff was able to defraud investors for decades before his investment fund was revealed as Ponzi scheme in 2009.) Under the Kokesh precedent, clever fraudsters can manage to retain any ill-gotten gains from outside the five-year window.  

“The implications of the Kokesh ruling limiting the SEC’s enforcement window to five years have been significant. The SEC’s 2018 enforcement report noted that ‘the court’s ruling in Kokesh may cause the Commission to forgo up to approximately $900 million in disgorgement, of which a substantial amount likely could have been returned to retail investors.’ The Securities Fraud Enforcement and Investor Compensation Act addresses this problem by expanding the range of tools available to the SEC to pursue compensation for scammed investors, subject to a 10-year statute of limitations.”

Clayton gave his support for this bill during the hearing.