Class Action Lawsuit Claims SEC ‘Disgorgement’ Falls Outside Agency’s Authority
Last Updated on May 8, 2018
Jalbert v. Securities and Exchange Commission
Filed: October 26, 2017 ◆§ 1:17-cv-12103
A trustee for the F-Squared Liquidating Trust claims the SEC should repay 'disgorgement' that he claims the agency confiscated without authority.
The United States Securities and Exchange Commission (SEC) is the defendant in a proposed class action filed in Massachusetts by the trustee of the F-Squared Liquidating Trust. The plaintiff charges that the trust’s owning entity, F-Squared Investment Management, LLC, is one of the numerous entities from which the SEC has collected money as “disgorgement” – a means of collecting profits obtained through allegedly illegal or unethical acts – without or in excess of proper authority to do so. The 25-page complaint says the SEC has obtained at least $14.5 billion over the last six years through purported “disgorgement,” with these proceeds going to the U.S. Treasury. These “disgorgement” payments to the SEC, the lawsuit charges, were often well in excess of monetary penalties the agency gained under explicit statutory fines levied under federal securities laws, which the case notes all have maximum monetary penalty limits.
From the lawsuit (emphasis ours):
“The Supreme Court in Kokesh v. SEC, 137 S. Ct. 1635 (2017), recently analyzed the SEC’s historical use of purported ‘disgorgement’ and found that ‘disgorgement’ in SEC actions operated as a penalty because the SEC sought and obtained ‘disgorgement’ for punitive, law-enforcement reasons, and because, as the Supreme Court observed, in many SEC enforcement cases ‘disgorgement’ was not compensatory but paid to the U.S. Treasury. Because SEC ‘disgorgement’ is not remedial and constitutes a penalty, in each case in which the SEC obtained ‘disgorgement’ and handed the proceeds over to the U.S. Treasury, it did so without proper statutory authority. Put differently, there is no statutory authority for the SEC to collect a penalty labeled as ‘disgorgement’ separate from, and often in addition to, a civil penalty.”
The plaintiff trust outright alleges the “disgorgement” it handed over to the SEC was nothing more than an unauthorized fine. The case mentions that the plaintiff trust paid the SEC $30 million in “disgorgement” as the result of a cease-and-a-desist proceeding the agency commenced in 2014.
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