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Last summer, the Supreme Court’s decision in Liu reaffirmed the SEC’s authority to seek disgorgement as a remedy in enforcement actions.  Following the Court’s decision, some questioned whether Liu changed or removed the five-year statute of limitations that was settled in the Supreme Court’s Kokesh decision.  Russ Ryan, former Assistant Director of Enforcement and Partner with King & Spalding offered one take on this question and discussed several reasons Liu likely doesn’t give the SEC unlimited time to sue for disgorgement claims.  But now, Congress stepped in and passed the National Defense Authorization Act for Fiscal Year 2021 (NDAA), which includes amendments to the Exchange Act relating to the SEC’s ability to seek disgorgement awards.

The proposed amendments provide the SEC with express statutory authority to seek disgorgement in civil enforcement proceedings pending in federal court.  And, the amendments double the statute of limitations – from 5 years to 10 years – for the SEC to seek disgorgement in claims involving fraud, although it reaffirms the 5-year limitation period to seek disgorgement for non-fraud claims.

This Paul Weiss memo provides an overview of the proposed amendments and says they are a direct Congressional response to the limitations imposed by the Supreme Court in Liu and Kokesh.  One potential impact of the proposed amendments is that they may increase the SEC’s power when its involved in settlement negotiations.  As noted in the memo though, the full scope and actual impact of the amendments remain to be seen and the amendments raise additional issues.  Here’s an excerpt:

If enacted, the NDAA will bolster the SEC’s ability to seek disgorgement in civil actions, both by doubling the statute of limitations and by providing the SEC with express statutory authority to seek such a remedy. Nonetheless, the full scope and impact of these amendments remain to be seen, and will likely require case law development. For example, it will likely fall to the courts to determine whether the SEC’s authority to seek “disgorgement”—now untethered from the SEC’s separate authority to seek “equitable relief”—will continue to be bound by the equitable limitations identified in Liu. On the other hand, the statutory authorization to require disgorgement of any unjust enrichment “by the person who received such unjust enrichment” could limit the persons subject to disgorgement even more than the Supreme Court’s decision in Liu, which permitted the SEC to seek disgorgement against affiliates of the wrongdoer in certain circumstances.

Right before last week’s holiday, the President vetoed the NDAA. The President’s reasons for vetoing the bill are unrelated to the SEC’s authority in seeking disgorgement awards – the House voted to override the President’s veto, while it’s unclear exactly when the Senate will consider the veto override.

Paycheck Protection Program: Potential Onslaught of Investigations

Throughout the last year, we blogged quite a bit about the federal government’s Paycheck Protection Program – here’s a blog about an SEC enforcement sweep of public company borrowers.  As we get ready to ring in 2021 and put 2020 behind us, last week Congress allocated more funding for the program as part of the most recent economic stimulus package – John blogged about some of the changes with this most recent funding.  But, this K&L Gates memo warns companies should expect a continued wave of PPP investigations in 2021.

The memo includes several stats indicating a potential onslaught of enforcement actions, including that the SBA fraud hotline received more than 100,000 complaints in 2020 (compared to 742 complaints received in 2019) and that the SEC has brought seven COVID-19 related fraud actions and has opened more than 150 COVID-19-related investigations and inquiries. For PPP lenders and recipients, the memo says now’s the time to be proactive to be able to show more than the bare minimum has been done to ensure strong compliance with the PPP program. The memo has this advice for actions companies can take now:

Overall, lenders, recipients, and any others involved in the PPP loan approval process will want to demonstrate their specific, good faith, and documented efforts to ensure that loans not only would be disbursed and received speedily, but also carefully limited to properly covered companies and individuals. In particular, companies should revisit their control processes and document the good and compelling reasons for specifically implementing them at the time (and any changes later made), initiate and conduct routine compliance checks regarding the same, identify any red flags suggesting fraudulent or other suspicious activity, and investigate them appropriately with aid of counsel.

Farewell to Jacob Stillman

Yesterday, the SEC issued a statement mourning the passing of Jacob Stillman.  Jake served the Commission for 55 years, including 17 as Solicitor and passed away December 25th.  Jake’s tenure at the SEC spanned 11 administrations and he is remembered as a man of great character, a lawyer with unparalleled knowledge of the securities laws, and a beloved colleague. Over the course of his career, Jake received numerous awards, among them the Federal Bar Association’s 48th Annual Justice Tom C. Clark Award for Outstanding Government Lawyer. He also was honored by his peers with the William O. Douglas Award, granted by the Association of Securities Exchange Commission Alumni.

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– Lynn Jokela