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NDAA Codifies Equitable Remedies and Expands Disgorgement Statute of Limitations

By Robert R. Boeche, Partner and Emily Manzer, Law Clerk of Shustak Reynolds & Partners, P.C. posted on Tuesday, May 25, 2021.

On January 1, 2021, Congress passed H.R. 6395 National Defense Authorization Act for Fiscal Year 2021 (NDAA).[1] While the act covers various issues, Section 6501 amends portions of the Securities Exchange Act of 1934 (Exchange Act) regarding disgorgement and equitable remedies.[2] The NDAA codified, extended, and created a tolling formula for the Securities and Exchange Commission’s (SEC) authority to pursue disgorgement and other equitable remedies, including injunctions, bars, suspensions, or cease and desist orders.[3]

Historically, courts have allowed the SEC to seek such remedies within certain judicial constraints.[4] However, recent caselaw has created questions surrounding whether the SEC can disgorge wrongdoers under joint and several liability theories.[5] The NDAA may have cleared up this controversy by limiting the SEC to seek recovery for “any unjust enrichment [from] the person who received such unjust enrichment as a result of such violation.”[6]

While the NDAA resolved some issues, it may have created others. Recently, the Supreme Court condemned disgorgement awards that were routed to the Treasury rather than issued to harmed investors because the SEC’s statutory authority only allowed for “equitable relief that may be appropriate or necessary for the benefit of investors.” [7] But the new amendment does not mention “for the benefit of investors” and rather is housed as “any unjust enrichment” prompting the argument that the SEC may construe the language as not requiring it to hand over the recovered funds to injured investors.

In addition to codifying the SEC’s disgorgement authority, the amendment updated the statute of limitations and provided a section on tolling. The act extended the period to bring disgorgement claims against violators with scienter from five to ten years.[8] Additionally, the act codified the judicially created five-year statute of limitations for disgorgement claims against violators without scienter.[9] The NDAA imposed a ten-year statute of limitations for the SEC to bring any actions in which they seek equitable remedies.[10] Any time the violator spends “outside of the United States shall not count towards the accrual” of the statute of limitations period. 

These amendments apply “to any action or proceeding that is pending on, or commenced on or after” January 1, 2021.[11] Therefore, the NDAA has opened the door to recover for claims previously barred because the violator spent significant time out of the United States or the victim failed to discover the violation timely.

How will all of this alter the SEC’s approach to bringing and maintaining claims remains to be seen.  However, with the authority granted under the NDAA, the SEC can take their time in aggressively pursuing claims. These changes require all parties to take a proactive approach in evaluating their conduct and books and records from the past ten years.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. 
We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. 
Attorney Robert R. Boeche can be reached in the firm’s San Diego office at (619) 696-9500.

 


[1] National Defense Authorization Act for Fiscal Year 2021 Includes Numerous Provisions Impacting Government Contractors, JDSupra (February 19, 2021) https://www.jdsupra.com/legalnews/national-defense-authorization-act-for-5444697/.

[2] Id.

[3] H.R. 6395 National Defense Authorization Act for Fiscal Year 2021, Section 6501.

[4] See Kokesh v. SEC, 137 S. Ct. 1635 (2017); Liu v. SEC, 140 S. Ct. 1936 (2020).

[5] See Liu v. SEC, 140 S. Ct. 1936 (2020).

[6] H.R. 6395 National Defense Authorization Act for Fiscal Year 2021, Section 6501(a)(1)(B)(ii).

[7] Liu v. SEC, 140 S. Ct. 1936 (2020).

[8] H.R. 6395 National Defense Authorization Act for Fiscal Year 2021, Section 6501(a)(8)(A)(i).

[9] H.R. 6395 National Defense Authorization Act for Fiscal Year 2021, Section 6501(a)(8)(A)(ii).

[10] H.R. 6395 National Defense Authorization Act for Fiscal Year 2021, Section 6501(a)(8)(B).

[11] H.R. 6395 National Defense Authorization Act for Fiscal Year 2021, Section 6501(b).

 

 

 

 

 

 

 

 

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