(Article from Securities Law Alert, Year in Review 2020)
For more information, please visit the Securities Law Alert Resource Center
SEC May Seek Disgorgement in Civil Enforcement Proceedings Provided the Award Does Not Exceed Net Profits
On June 22, 2020, in Liu v. SEC, 140 S. Ct. 1936 (2020) (Sotomayor, J.), the Supreme Court resolved the question it raised but left open in Kokesh v. SEC, 137 S. Ct. 1635 (2017): whether the SEC is authorized to seek disgorgement in federal court proceedings. In an 8-1 decision, the Court upheld but circumscribed the SEC’s ability to seek disgorgement. Specifically, the Court held that disgorgement constitutes permissible “equitable relief” under 15 U.S.C. § 78u(d)(5), but only where disgorgement is based on net profits and ordinarily where disgorged funds are distributed to victims.
When the SEC brings enforcement actions in federal court, it is authorized by statute to seek a range of remedies, including “any equitable relief that may be appropriate or necessary for the benefit of investors.” In Kokesh, the Court held that disgorgement of profits is a “penalty” for the purposes of statutes of limitations. However, the Kokesh Court explained in a footnote that “[n]othing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context.”[1]
In Liu, the petitioners argued that disgorgement was not an equitable remedy, and therefore, not within the statutory authorization. The Court held that a disgorgement award is proper so long as it (1) does not exceed the wrongdoer’s net profits, and (2) in the ordinary case, is given to victims of the wrongdoing. The Court observed that equity practice has historically allowed courts to deprive wrongdoers of ill-gotten gains and that these remedies are equitable (instead of punitive) so long as they are restricted to net profits and awarded to victims. In light of this history, the Court held the SEC is within its statutory authority to seek disgorgement in civil suits. The Court declined to extend Kokesh’s conclusion that disgorgement is a penalty beyond the statute of limitations context, noting that “that decision has no bearing on the SEC’s ability to conform future requests for a defendant’s profits to the limits outlined in common-law cases awarding a wrongdoer’s net gains.”
Justice Thomas dissented, writing that he would hold that disgorgement is not an “equitable remedy” within the meaning of § 78u(d)(5). In his view, “[d]isorgement is not a traditional equitable remedy” but is instead “a creation of the 20th century.”
“Actual Knowledge” Requirement for the Three-Year Statute of Limitations for ERISA Breach of Fiduciary Duty Claims Is Not Satisfied Merely by the Plaintiff’s Receipt of the Relevant Disclosures
ERISA breach of fiduciary duty claims are subject to a six-year statute of limitations unless the plaintiff “had actual knowledge of the breach or violation,” in which case a three-year statute of limitations applies. 29 U.S.C. § 1113(2). On February 26, 2020, the Supreme Court held that an ERISA plaintiff does not necessarily have “actual knowledge” of information contained in disclosures that he received but did not read or recall reading. Intel Corp. Inv. Pol’y Comm. v. Sulyma, 140 S. Ct. 768 (2020) (Alito, J.). The Court found that in order to satisfy Section 1113(2)’s “actual knowledge” requirement, “the plaintiff must in fact have become aware of that information.”
In a unanimous decision authored by Justice Alito, the Court held that Section 1113(2)’s “actual knowledge” requirement demands “more than evidence of disclosure alone.” The Court determined that “[Section] 1113(2) begins only when a plaintiff actually is aware of the relevant facts, not when he should be” based on the receipt of the relevant disclosures. The Court explained that “a given plaintiff will not necessarily be aware of all facts disclosed to him; even a reasonably diligent plaintiff would not know those facts immediately upon receiving the disclosure.”
The Court rested its decision on the plain meaning of the phrase “actual knowledge.” The Court found that the phrase “actual knowledge” refers to “[r]eal knowledge as distinguished from presumed knowledge or knowledge imputed to one.” The Court explained that in order “to have ‘actual knowledge’ of a piece of information, one must in fact be aware of it.” The Court found that “if a plaintiff is not aware of a fact, he does not have ‘actual knowledge’ of that fact however close at hand the fact might be.”
Supreme Court Agrees to Hear Class Action Certification Challenge
On December 11, 2020, the Court announced that it would hear a bank’s challenge to the certification of an investor class in a long-running securities fraud case. Goldman Sachs Grp. v. Ark. Teacher Ret. Sys., (No. 20-222). The highly anticipated decision, expected before the end of the Court’s current term in June, concerns the ability of defendants to rebut the presumption of shareholder reliance and the extent to which defendants in opposing class certification can rely on materiality.
On April 7, 2020, the Second Circuit affirmed the district court’s certification of a class, which accused defendant of misrepresenting its ability to identify and address conflicts of interest. Ark. Teacher Ret. Sys. v. Goldman Sachs Grp., 955 F.3d 254 (2d Cir. 2020) (Wesley, J.).[2] Plaintiffs alleged that certain “general statements” (for example, “[o]ur clients’ interests always come first[]”) were false because defendant “made them while knowing that it was riddled with undisclosed conflicts of interest.” The Second Circuit held that the district court did not “abuse[] its discretion by certifying the shareholder class, either on legal grounds or in its application of the Basic presumption.” This refers to the presumption of classwide reliance on the alleged misrepresentations that plaintiffs must invoke for a private securities lawsuit to proceed as a class action, which was first recognized in Basic v. Levinson, 485 U.S. 224 (1988). In their cert petition, defendants asked the Court to address two questions. First, whether a defendant may rebut the Basic presumption by pointing to the generic nature of the alleged misrepresentations to show that the statements had no impact on the price of the security, even though that evidence is also relevant to the substantive element of materiality. Second, whether a defendant seeking to rebut the Basic presumption has only a burden of production or also the ultimate burden of persuasion. Commentators have noted that in practice the Basic presumption is rarely rebutted and that class certification often causes defendants to settle rather than risk further litigation.
[1] Please click here to read our discussion of the Supreme Court’s decision in Kokesh.
[2] Simpson Thacher filed an amici curiae brief with the Second Circuit on behalf of the Securities Industry and Financial Markets Association and the Bank Policy Institute in support of defendants-appellants.