Follow Us On Twitter
Archives by Category
Archives
Friday
Jul282017

Halliburton Settles FCPA Allegations for $29.2 Million

What Happened?
On July 27, 2017, the U.S. Securities and Exchange Commission charged Halliburton Company with violating the books and records, as well as the internal controls, provisions of the Foreign Corrupt Practices Act (“FCPA”).  The Commission alleged that, in order to obtain contracts in Angola resulting in profits of $14 million, Halliburton inappropriately directed subcontracts to a local Angolan company with ties to an official with the state-owned oil company.

The Rundown
Simply stated, the FCPA, enacted in 1977, prohibits American companies and its representatives from bribing foreign officials.  Criminal violations of this law are prosecuted by the U.S. Department of Justice.  Violations of the FCPA also carry with them potential civil penalties that are investigated and prosecuted by the Securities and Exchange Commission.   15 U.S.C. § 78m sets forth the “books and records” and “internal controls” provisions of the FCPA.  When a company makes inappropriate payments to foreign officials, the books and records of that company do not accurately reflect the financial status of the company and the transactions in which it engaged.  Hence, civil liability attaches.  Furthermore, companies issuing securities in the United States are required to enact internal controls to ensure compliance with legal mandates.  Inappropriate payments and/or bribes reflect a failure to implement effective internal controls.

In this case, the SEC alleges that Halliburton’s Vice President, Jeannot Lorenz, spearheaded efforts to direct projects to a local business with connections to an official at Sonangol, Angola’s state-owned oil company.  Instead of determining services that Halliburton needed to outsource and put those projects out for bid to local Angolan-owned businesses, Lorenz was alleged to have worked backwards.  Lorenz first identified the companies to be hired and backed into the tasks that were required.  No competitive bidding process was implemented.  In all, Halliburton is alleged to have directed $13 million worth of work to a business connected to an Angolan official.  In return, Halliburton profited by $14 million from the contracts it received. 

Without admitting or denying the allegations levied by the Commission, Halliburton has agreed to pay $14 million in disgorgement, $1.2 million in prejudgment interest, and $14 million in civil monetary penalties.  In addition, Lorenz has agreed to pay $75,000 in penalties for causing the company’s violations and circumventing the company’s internal controls.

The Take-Home
Violations of the FCPA have both civil and criminal ramifications.  When working abroad, companies must be ever vigilant of payments to local officials and/or individuals or entities related to them.  Transparency International, a global coalition against corruption, publishes an annual Corruption Perceptions Index of 176 countries.  Out of 176 countries, Angola was perceived last year to be more corrupt than 163 other countries.  Companies must be on high alert when working in companies perceived to be corrupt.  The government has Internet access just like everyone else and can easily target investigations in these locales.  Even if criminal charges are not pursued, civil allegations have teeth and can harm a company nearly as much as a criminal prosecution.   

What Happens Next?
As part of Halliburton’s settlement, the company must retain an independent compliance consultant for a period of 18 months to review and evaluate its anti-corruption policies and procedures.

Friday
Jul212017

Second Circuit Vacates Silver Conviction, Questions Whether All Official Acts Worth Punishing

What Happened? 
The U.S. Court of Appeals for the Second Circuit vacated the judgment of conviction against Sheldon Silver, the former Speaker of the New York State Assembly, who was found guilty of committing honest services fraud, Hobbs Act extortion, and money laundering following a jury trial. United States v. Silver, --- F.3d ----, 2017 WL 2978386 (2d Cir. Jul. 13, 2017).

The Rundown
Silver appealed from his judgment of conviction, arguing primarily that the District Court’s jury instructions were erroneous under the U.S. Supreme Court’s subsequent decision in McDonnell v. United States, 136 S. Ct. 2355 (2016). In McDonnell, the Supreme Court clarified that an “official act,” an element of honest fraud and extortion, is a “decision or action on a ‘question, matter, cause, suit, proceeding or controversy’” involving “a formal exercise of governmental power.” At Silver’s trial, the district court instructed the jury that an official act was “any action taken or to be taken under the color of official authority.” While that instruction was consistent with the law at the time it was given, the McDonnell Court’s definition of “official act” made it erroneous in retrospect. The error was not harmless, per the Court, because it was not clear that the jury would have found Silver guilty were it properly instructed.

But the Court went beyond applying McDonnell. It also suggested that a jury could reasonably consider some of Silver’s alleged misconduct to be too perfunctory to constitute the quo of a quid pro quo fraudulent scheme, even if it passed muster as an “official act.” On retrial, the jury must find not only that Silver was compensated for official acts, but also that those acts were significant enough to constitute fraud.

For the Record
Judge Cabranes, writing for the Court, on the nature of resolutions honoring constituents: “A rational jury could . . . conclude that, though certainly ‘official,’ the prolific and perfunctory nature of these resolutions make them de minimis quos unworthy of a quid.

The Take-Home
It is worth monitoring whether U.S. Attorney’s Offices within the Second Circuit alter their charging practices based on the Court’s suggestion that not all “official acts” are significant enough to warrant conviction. In any event, future defendants now have footing to argue for favorable jury instructions or vacating their convictions based on the Court’s observation.

What Happens Next?
Acting U.S. Attorney Joon H. Kim asserted that Silver will be retried. 

Tuesday
Jul182017

Department of Education Revisits Title IX Due Process for Respondents: What Does This Mean For Higher Education?

What Happened?

The Department of Education’s recent comments strongly suggest that it will be revisiting the 2011 Dear Colleague Letter, particularly whether the required process for investigating allegations of sexual assault are unfair to, and biased against, respondents (students defending themselves against allegations of sexual assault). On the heels of this announcement, Columbia University recently settled the twice-dismissed lawsuit by a male student accused, but exonerated, of allegations that he sexually assaulted a student. The plaintiff student alleged that Columbia engaged in gender-based discrimination after he was cleared of the allegations.

The Rundown

The 2011 Dear Colleague Letter was the high water mark for a process that was heavily weighted in favor of the complainant. Over the years, particularly as codified by the October 2014 regulations promulgated pursuant to the Violence Against Women Reauthorization Act (“VAWA”), the pendulum has been swinging back towards affording respondents defined due process rights, including mandated notice and advisor-of-choice provisions. However, colleges and universities still are afforded great discretion in how to proceed with the investigation and resolution of Title IX complaints. The Department of Education's recent comment is a potential further swing of the pendulum toward greater due process for respondents.

The Take-Home

What does this mean for institutions of higher education? Expect more specific requirements for due process for respondents - more specific notice, more input by respondent into the investigative process, and an assault on the “single investigator” model. Also expect a push to provide schools with the discretion to delay its Title IX process while a criminal investigation is ongoing - thereby removing the Hobson's Choice faced by respondents of defending against the school's disciplinary process and giving up the Fifth Amendment right to remain silent; or invoking that right and being unable to provide a statement in the investigative process or to testify at a disciplinary hearing.

Educational institutions are wise to build into their Title IX process greater due process to respondents than that required by current law, in support of both the institution’s culture and to minimize the likelihood of lawsuits surviving past the motion practice stage (if they are filed at all). Schools should anticipate a future mandate from the Department of Education that will require further modification of the existing Title IX policies and procedures.

Thursday
Jul132017

SEC Files Fraud Charges Against Founder of Bitcoin Store

What Happened?
At the end of June, the SEC filed fraud charges against Renwick Haddow, a U.K. Citizen and alleged founder of a Bitcoin platform and chain of shared office spaces, alleging his use of the United States as the base of operations to defraud investors out of $37.7 million.

The Rundown
The SEC filed its civil complaint in the Southern District of New York, alleging that Haddow – through the creation and use of sham companies – mislead investors into believing that the companies had ongoing operations and capable senior executives ready to take the helm.  The SEC contends that  the Bitcoin platform – named the Bitcoin Store – didn’t have any operations or gross sales.  The complaint also alleged that the supposed executives, in the SEC’s words, “do not appear to exist,” and approximately $5 million of the invested funds were not invested in operations as promised.  They were diverted to overseas banks in Mauritius and Morocco.  The complaint seeks several forms of relief including the return of the investors’ funds and injunctive relief barring Haddow from further violations of the Securities Exchange Act and related laws.

In addition to filing the complaint, the SEC obtained an order granting an emergency freezing of the assets of Haddow and his companies.  Haddow also faces criminal charges in the Southern District of New York related to the alleged fraud.

For the Record
“As alleged in our complaint, Haddow created two trendy companies and misled investors into believing that highly-qualified executives were leading them to quick profitability.  In reality, Haddow controlled the companies from behind the scenes and they were far from profitable,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The Take-Home
This case serves as another reminder of the SEC’s authority to protect the investing public through the use of civil actions seeking monetary penalties, injunctive relief, disgorgement of illegally-obtained funds, the freezing of assets through a number of statutes including the Securities Act of 1933 and Exchange Act of 1934.

Wednesday
Jul122017

Pennsylvania Senate Passes "Clean Slate" Bill

What Happened?
The Pennsylvania Senate passed the “Clean Slate” bill, which would automatically seal nonviolent misdemeanor convictions of individuals who have not been convicted of a crime in the last ten years.

The Rundown
Pennsylvanians with misdemeanor convictions must currently petition the court to seal old convictions, but the Commonwealth’s new Clean Slate law could seal their criminal records automatically.  Under the legislation, which was crafted in part to help individuals with minor convictions obtain employment, nonviolent misdemeanor convictions will be sealed automatically where the offender has been crime-free for ten years. 

The digitization of criminal records has made it easier for companies to conduct background checks on potential employees, increasing the likelihood that an applicant’s criminal record could impact their chances of getting the job.  While this technology may be a good thing in the case of violent crimes and felonies, the increased use of background checks that reveal even the most benign criminal offenses may also eliminate job opportunities for individuals with old and minor convictions who would otherwise be qualified contenders.  Though many misdemeanor convictions can be sealed under the current law, most eligible candidates do not petition the court to seal their records, leaving them accessible to the public’s—and potential employer’s—view.

The Clean Slate law will remedy this problem by taking advantage of Pennsylvania’s centralized electronic record system to identify eligible convictions and cross-reference them against court records in each of the Commonwealth’s judicial districts.  Convictions that meet the law’s criteria will automatically be sealed.  The law would also save taxpayer time and money, as court employees will no longer have to personally review records and respond to petitions on a case-by-case basis.   

For the Record 
The Clean Slate bill’s sponsors include both Republicans and Democrats, and it is supported by the Pennsylvania District Attorneys Association and the Pennsylvania State Police.  Republican Senator Scott Wagner, the prime co-sponsor of the legislation, wrote that while the bill may be perceived as “risky” by some people, if it becomes a law, “it has the potential to change the lives of hardworking people who are trying to provide for their families and create a better life for their children.”  

The Take Home
This legislation represents a desire to reform our criminal justice system so that nonviolent offenders who have overcome their criminal problems are not held back by their past mistakes.  By sealing eligible convictions automatically, Pennsylvania takes the burden off of individuals who may not have the time, money, or legal know-how to petition the court themselves.

What Happens Next
The bill was passed by the Pennsylvania Senate and sent to the House on June 29, 2017, where it is currently being considered by the Judiciary Committee. 

Friday
Jun302017

Philadelphia's District Attorney Pleads Guilty

What Happened?
In an unexpected turn of events, Philadelphia District Attorney, Rufus Seth Williams, entered a guilty plea on day 9 of his federal corruption trial. Judge Paul S. Diamond immediately convened a detention hearing and remanded Mr. Williams to the Federal Detention Center to await sentencing. As part of his plea, federal agents hand-delivered Mr. Williams’ resignation letter to Mayor Jim Kenney at 2:05 p.m., ending Williams’ promising prosecutorial career that started in 1992 fresh out of Georgetown Law.

The Rundown
R. Seth Williams’ guilty plea on June 29, 2017 was a surprise to local attorneys, the media, and even the staff of the District Attorney’s Office.  Acting District Attorney Kathleen Martin only learned of the plea by text from Mr. Williams a few hours prior to the plea. Mr. Williams took the oath of office as District Attorney on January 4, 2010. Seven years later, on March 21, 2017, a grand jury indicted Mr. Williams on 23 counts of bribery, extortion, and fraud. The government filed a superseding indictment adding six additional counts on May 9, 2017, and trial began on June 19, 2017.

Judge Paul Diamond, citing the public’s interest in a speedy trial, placed this matter on track for one of the shortest spans from indictment to trial that this District has ever seen. Perhaps by strategy in an attempt to call the government’s bluff, defense counsel did not seek any lengthy continuance of trial. Upon swearing of the jury to hear the case, Mr. Williams and his team were confronted with blistering testimony of unlawful activity. A local businessman, Mohammad N. Ali, testified to showering Williams with expensive gifts, including luxury travel.

On Thursday, June 29, 2017, at approximately 10:00 a.m., media began reporting that the Williams trial was behind schedule for the day. Mr. Williams was in a conference room off the courtroom, and his counsel and others close to him were shuttling back and forth into the room. Signed documents were exchanged among counsel. Shortly thereafter, a Twitter post revealed that Acting United States Attorney for the Eastern District of Pennsylvania, Louis D. Lappen, entered the courtroom. The signal of a guilty plea was clear.

In another stunning turn of events, the plea included only one of the 29 counts of the superseding indictment. Charges that could have led to Mr. Williams spending the rest of his life in a federal prison had been whittled down to a single count with a maximum sentence of 5 years’ incarceration. Mr. Williams, who told the judge that he only has between $100 and $200 in his bank account, also faces a fine of $250,000. The Philadelphia City Controller is already seeking to forfeit Mr. Williams’ pension, in part to repay attorneys’ fees fronted by the city prior to Mr. Williams’ indictment. 

The Take-Home

Who won the trial? Is there a winner here? Certainly Mr. Williams saw the writing on the wall and limited his exposure to what some might consider a light sentence of no more than 5 years for someone who, as Judge Diamond put it, “sold his office.” Perhaps the government thought it wise to secure the resignation and conviction of a corrupt politician regardless of the length of sentence.

In another interesting turn, Mr. Williams admitted to all of the factual allegations in the superseding indictment. Therefore, although he is facing sentencing on only one count of violating 18 U.S.C. 1952(a)(3), there are now 63 pages of relevant conduct in the superseding indictment that Judge Diamond may consider when imposing sentence. 

Although the Federal Sentencing Guidelines are not mandatory, Judge Diamond must consider them. There are many aspects of the offense that must be considered to derive the applicable offense level. There could be enhancements applied, and counsel will argue those to the judge once the presentence investigation is completed. The notice of forfeiture attached to the superseding indictment details $33,765.22 in bribes received and $31,112.70 of fraud proceeds, for a total of $64,878.22. Using this figure as the loss amount, Mr. Williams is facing at least a standard range sentence of 12 to 18 months, using the base offense level of 7 and adding 6 points for the loss amount. This does not take into account Mr. Williams’ role as District Attorney and other relevant factors that can increase the range. 

Given Judge Diamond’s comments during the detention hearing that Mr. Williams “sold his office” and that he “cannot be trusted,” it would come as a shock to the community if the sentence imposed was only a year or two of incarceration. The government agreed to withdraw 28 counts in negotiating this plea, but the judge can certainly use all of the facts connected to those 28 counts to sentence Mr. Williams to the maximum of 5 years’ incarceration.

What Happens Next?
Sentencing is scheduled for October 24, 2017 at 9:30 a.m. Stay tuned to www.white-collared.com for additional updates. U.S. v. Williams is docketed at 2:17-CR-00137 (E.D.Pa.).

Tuesday
Jun272017

New Jersey's New Anti-Corruption Programs: A Short-Term Solution to the AG's Long-Term Access to Information Problem

What Happened? 

On May 9, 2017, New Jersey Attorney General Christopher S. Porrino announced two new initiatives, the Anti-Corruption Reward Program and the Anti-Corruption Whistleblower Program, to fight public corruption by incentivizing people with valuable information to come forward to law enforcement. 

The Rundown 

 The Issue the Incentives are Trying to Solve 

New Jersey’s anti-corruption laws impose mandatory minimum terms of imprisonment and parole ineligibility for elected officials, government employees, and companies receiving public funds whose illegal behavior somehow relates to their public office or employment. Despite law enforcement’s persistent efforts to prosecute these cases, one of the main challenges they face is securing initial leads that provide the necessary information to form a case around the more dexterous defendants. In an effort to solve this problem, the Attorney General announced two initiatives aimed at gathering more information from the public and less culpable players in a scheme to help prosecute these public corruption cases. 

The Anti-Corruption Reward Program

The first initiative, the Anti-Corruption Reward Program, offers up to $25,000 to the public for tips leading to a conviction of a public corruption crime. The funding for the reward is supplied by the Attorney General’s office and comes from criminal forfeiture funds (money derived from crime surrendered to the state). In most cases, only the first person to come forward with unknown information will receive the reward. However, in some cases where two or more people provide different information, the reward may be apportioned. People coming forward with information under this program may not have participated in the crime at issue. Additionally, the reward is not available to government employees who learn of the crime through the course of their employment if they are obligated to report such crimes. 

The Anti-Corruption Whistleblowing Program 

The second initiative is the Anti-Corruption Whistleblower Program. This program encourages less-culpable persons involved with the crime at issue to report information in an exchange for an agreement with the Attorney General’s office to waive prosecution of the whistleblower. Individuals may choose to report the information anonymously and/or through an attorney to determine whether they are eligible for a waiver. Ultimately, it is the individual’s choice whether or not to proceed. The whistleblower must provide truthful and accurate information and must cooperate with investigators. Corporations may also apply for the program if: (1) the corrupt activity was committed by its employees; (2) the activity was committed without the knowledge, acquiescence, or participation of the high-level employees, officers, directors or shareholders seeking waiver of prosecution; and (3) the corporation took prompt action to terminate the illegal activity and report it to law enforcement. Elected officials, persons who had a controlling role in the scheme, or persons who enlisted others to join the scheme are not eligible to apply for the program. Whistleblowers that are eligible for the program should be cautioned that involvement in the program may result in the loss of their public employment. 

For the Record 

These new programs offer strong incentives for people to come forward confidentially and help us root out public corruption, whether they’re tipsters from the public seeking a reward, or public workers or others seeking to extricate themselves from a corrupt scheme.  By offering the programs for a limited time, we’re looking for swift results, and we will vigorously pursue every lead. -- Director Elie Honig of the Division of Criminal Justice, New Jersey. 

The Take-Home 

For now, the programs are only in effect until August 1, 2017. While they seem to directly confront the issue of getting necessary information from potentially hesitant sources, it is curious that the Attorney General’s office believes implementing these programs for a total of three months will help achieve this long-term goal. In fact, the limited duration of these programs begs the question: is there particular information the Attorney General’s office is looking for? Regardless, the use of these programs may illustrate whether the incentives are convincing enough to create opportunity for a more durable solution in the future. 

Wednesday
Jun212017

Genesis Healthcare to Pay $53.6 Million to Settle Medical Necessity Allegations in Billing for Rehab and Hospice Care

What Happened?

On Friday, DOJ announced that Genesis Healthcare, Inc. had agreed to terms, including the payment of $53,639,288.04, to settle six separate lawsuits and investigations that alleged violations of the False Claims Act relating to allegations that Genesis had billed for medically unnecessary therapy and hospice services, and “grossly substandard” nursing care. The settlement covers operations at Genesis subsidiaries that it had acquired after most if not all of the conduct complained of had occurred. 

The Rundown

Hospice and Rehabilitation

The agreement reached with DOJ includes settlement of allegations that from 2010 through March of 2013, Genesis subsidiary Skilled Healthcare Group Inc. (SKG) and its subsidiaries submitted false claims by (1) billing for hospice services for patients who were not terminally ill, and (2) billing inappropriately for certain physician evaluation management services at the SKG Creekside Hospice facility in Las Vegas. In addition, Genesis settled claims that from 2005 through 2013, SKG and its subsidiaries submitted false claims at certain facilities by providing therapy to certain patients longer than medically necessary, and/or billing for more therapy minutes than the patients actually received. This set of claims also included allegations that the SKG subsidiaries assigned patients a higher Resource Utilization Group (RUG) level than necessary. Genesis did not acquire SKG and its related entities until after all of the conduct at issue had occurred.

Outpatient Therapy Charges

The settlement announced on Friday also wrapped in allegations regarding Genesis subsidiaries Sun Healthcare Group Inc., SunDance Rehabilitation Agency Inc., and SunDance Rehabilitation Corp. Specifically, the settlement resolves allegations that from 2008 through September of 2013, those entities billed for outpatient therapy services provided in the State of Georgia that were (1) not medically necessary or (2) unskilled in nature. Sun Healthcare and the SunDance entities were acquired by Genesis in December of 2012.

Allegations of Substandard Care

The last piece of the Genesis settlement resolves allegations that between 2003 and 2010, Genesis subsidiary, Skilled LLC, submitted claims at certain of its nursing homes for services that were grossly substandard and/or worthless and therefore ineligible for payment. At the heart of the claims of worthless services were allegations that the nursing homes at issue did not provide sufficient nurse staffing to meet residents’ needs. Genesis acquired Skilled LLC in February of 2015.  

For the Record

At a time when the cost of healthcare weighs heavy on many taxpayers, it is imperative that people who illegally bill our healthcare system are held accountable and forced to pay restitution. -- Special Agent in Charge David J. LeValley, FBI Atlanta

The Take-Home

While nobody knows at this point what healthcare reform efforts will bring during this legislative session, there should be little doubt that cost-reduction through pursuit of allegations of fraud and abuse will be one of the hallmarks of any proposal. Medical providers, particularly those providing hospice and rehabilitative services, can expect continued scrutiny of their documentation of medical care provided and the medical bases for it.  

Thursday
Jun152017

Judge Rakoff Pans Sentencing Guidelines, Grants Substantial Variance in Fraud Case

When he appeared before U.S. District Judge Jed Rakoff (S.D.N.Y.) for sentencing on June 14, 2017, Stefan Lumiere, a former analyst and portfolio manager at Visium Capital Management LP, was facing a 97-121-month range of imprisonment under the U.S. Sentencing Guidelines.  The advisory range for Lumiere, who was found guilty by a jury for securities fraud and related crimes regarding to the overvaluation of a $480 million health care hedge fund, was largely driven by a loss amount calculated in the tens of millions of dollars.

Lumiere boldly requested a non-custodial sentence. In support of that outcome, Lumiere argued that he had earned no money beyond his $200,000 salary (relatively modest for the market, his position, and the industry) based on the performance of the fund, and thus had not benefited significantly from the conduct. He also noted that he had no role investor communications; accordingly, he had not made the misrepresentations regarding the fund’s value that were at the root of the scheme. Finally, he focused on his positive personal characteristics, including his extensive volunteer work and his dedication to his family. In that vein, Lumiere submitted more than 60 character letters from family, friends, and colleagues.

While Judge Rakoff declined to impose a non-custodial sentence, he varied sharply downward from the Guidelines range.  He railed against the punitive nature of the Guidelines in general, and as applied to Lumiere. In this case, as in many, the range they produced bore no relationship to the statutory factors – such as the history and characteristics of the offender, the nature and circumstances of the offense, and the need for just punishment – that the Court was required to apply under 18 U.S.C. § 3553(a). After evaluating all of the evidence in light of the § 3553(a) factors, Judge Rakoff sentenced Lumiere to 15 months’ imprisonment and a $1 million fine.

The outcome demonstrates that effective sentencing advocacy can make a substantial impact in federal court.  But perhaps even more important is drawing the right audience, a judge who is willing to approach the U.S. Sentencing Guidelines with rigorous analysis and healthy skepticism in determining whether they produce a just result in the instant case. 

Wednesday
Jun142017

Unanimous Supreme Court Limits Key SEC Bargaining Chip

On Monday, the Supreme Court resolved an ongoing circuit split in its unanimous Kokesh v. Securities and Exchange Commission decision, putting to rest the question of whether or not disgorgement is subject to a 5-year limitations period.  Disgorgement is a form of restitution that is measured by the defendant’s ill-gotten gain.  The remedy seeks to deprive the defendant of any profits and remove any rewards associated with the unlawful conduct.  A main purpose of disgorgement is to deter the defendant from repeating the same or similar violation in the future.  In some cases, the Securities and Exchange Commission (“SEC”) uses this remedy as leverage in settlement negotiations. 

The circuits have been split as to whether disgorgement constitutes a penalty, forfeiture, or neither, for purposes of imposing the 5-year limitations period required by 28 U.S.C.A. § 2462.  Imposing the limitation would prevent the SEC from seeking disgorgement on ill-gotten gains obtained more than five years prior to the action.  Some circuits were imposing the 5-year limitations period after finding disgorgement to be a penalty or forfeiture, while others, such as the 10th Circuit, found that § 2462 did not apply to disgorgement at all.  Justice Sotomayor, writing for the Court in Kokesh, finally answers the question – disgorgement is a penalty and is subject to the 5-year statutory limitations period.

In Kokesh, the SEC brought an enforcement action after Kokesh allegedly misappropriated $34.9 million from four businesses from 1995-2009.  After a jury found Kokesh’s actions in violation of the Investment Company Act of 1940, the District Court imposed an injunction, civil monetary penalty, and disgorgement.  The District Court held that disgorgement is neither a penalty nor a forfeiture for the purposes of § 2462.  Thus, disgorgement was awarded based on Kokesh’s ill-gotten gains over the entire fourteen years.  The total remedies amounted to $2,354,593 for the civil monetary penalty and $34.9 million for the disgorgement judgment.  The 10th Circuit affirmed this decision.

The Supreme Court unanimously disagreed.  Several aspects of disgorgement convinced the Court that the remedy is punitive in nature.  First, disgorgement is a court-imposed consequence for violating a public law effecting the Government, as opposed to an action against a private victim.  Second, disgorgement acts as a deterrent for future violations by taking away the ill-gotten gains from the violator.  While the Government tried to argue that disgorgement is compensatory rather than punitive, the Court was not persuaded.  Ill-gotten gains are not always returned to the victims, and in some instances, may be sent to the Treasury instead.  

The practical effect of Monday’s decision is that Kokesh’s disgorgement judgment will go from $34.9 million to no more than $5 million.  This sizeable decrease illustrates the important issues that may arise from the Kokesh decision, like will the implementation of a limitations period for disgorgement weaken the deterrent effect sought after in the first place?  Only time will tell.