Kokesh And The Future Of SEC Receivers Abroad

Law360, New York (June 30, 2017, 11:38 AM EDT) — 



To quote Justice Sonia Sotomayor of the U.S. Supreme Court during argument in Kokesh v. U.S. Securities and Exchange Commission,[1] referring to the darling enforcement tool of the SEC — disgorgement — “If it looks like a forfeiture, why don’t we treat it like a forfeiture?”

That just about sums up the basis of the Supreme Courts’s unanimous ruling on June 5 in the same case, that SEC disgorgement orders are penalties under federal law.

The finding that disgorgement per se is a “penalty” is unlikely to have a dramatic effect on the ability of the SEC to recover assets abroad, given that foreign courts tasked with considering applications for recognition of SEC receivers and disgorgment orders already viewed this enforcement tool as penal in nature. Indeed, in the U.S., the Eleventh Circuit in SEC v. Graham[2] concluded that disgorgement fell within the ordinary meaning of “forfeiture.”

Despite a few judicial setbacks for the SEC in seeking to have its receivers recognized abroad — for example in Stutts v. Premier Benefit Capital Trust,[3] the Grand Court of the Cayman Islands decided that disgorgement proceedings were in favor of the state and formed part of the public law and therefore the receiver would not be recognized — there have been more recent cases that suggest the tide of judicial perception is changing.

In the case of Millennium Financial Ltd. V. McNamara,[4] the Court of Appeal of St. Christopher & Nevis found that the fact that a provision found within a law contains criminal sanctions, such as penalties or forfeiture, does not mean that the provision itself is penal in nature.

The court had regarded the terms of the U.S. receivership order and the affidavit of the U.S. receiver and found that the substance of the right sought to be enforced was the protection, preservation and collection of the remaining assets of Millennium for the benefit of defrauded investors and to compensate them. Accordingly, per the Court of Appeal, there was no issue of executing the penal laws of a foreign state, albeit that Millennium’s appeal against the order recognizing the receiver was allowed on other grounds.[5]

In Millennium, the Court of Appeal declined to follow the dicta of Goulding J. in Schemmer v. Property Resources Ltd. et al.[6] and Schofield J. in Stutts v. Premier Benefit Capital Trust regarding foreign penal law, preferring instead the dictum of Lord Phillips in Islamic Republic of Iran v. The Barakat Galleries Ltd.[7] The Court of Appeal relied upon the affidavit of the U.S. receiver, wherein he averred that none of the funds recovered would be paid to the SEC or any other United States government agency. Proceeds of disgorgement proceedings, however, are paid to the district court, which then decides how and to whom the monies should be distributed. Although disgorged funds may often go to compensate securities fraud victims for their losses, such compensation is a secondary goal.

In Kokesh v. SEC, the Supreme Court was tasked with considering the nature of disgorgement proceedings only, for the purpose of deciding whether a five-year limitations period for “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture,” applied to such proceedings. The court considered whether the wrong sought to be redressed by imposition of a sanction was a wrong to the public or a wrong to the individual, and whether it was sought “for the purpose of punishment, and to deter others from offending in like manner” rather than to compensate victims. The court found that SEC disgorgement was imposed by the courts as a consequence for violating public laws, i.e., a violation committed against the United States rather than an aggrieved individual, that it was imposed for punitive purposes and often not compensatory.

An important aspect of the Supreme Court’s ruling for the future of foreign recognition of SEC receivers’ powers is the confinement of its reasoning to disgorgement, noting that: “[T]he SEC pursues [disgorgement] ‘independent of the claims of individual investors’” in order to “‘promot[e] economic and social policies’,” quoting SEC v. Teo, 746 F. 3d 90, 102 (CA3 2014).

Foreign courts had already come to their own conclusions regarding disgorgement, as noted in Stutts referred to above and in Marada Global Corp. v. Marada Corp.,[8] where the Grand Court of the Cayman Islands also held that the disgorgement provisions of the Securities Acts were penal in nature. In Marada, however, the U.S. receiver, standing in the shoes of the management of Marada Global, moved to intervene in an interpleader summons relating to funds held in a Cayman bank and filed separate proceedings to preserve the funds. The Grand Court held that the claim before it was brought by a company with regard to rights that are available to any private litigant, and not by the receiver in his name.

It will be important for SEC receivers seeking recognition in foreign courts going forward to be cognizant of the factors that will influence the courts.

The manner in which pleadings are framed and the reliefs sought will need to be carefully analyzed, language used will need to be reviewed and censored as appropriate — don’t mention disgorgement! The Grand Court of the Cayman Islands in Marada sets out some helpful guidance on the issue of whether a claim sought to be enforced involves the assertion of foreign penal laws. The category of a right of action, i.e. whether public or private, will depend on the party in whose favor it is created, on the purpose of the law or enactment in the foreign state on which it is based, and on the general context of the case as a whole.

Further, the fact that the right, statutory or otherwise, is penal in nature will not preclude a person asserting a personal claim depending thereon. If, on the other hand, the purpose of the action is the enforcement of a sanction, power or right in the instance of the state in its sovereign capacity, it will not be entertained. This has always been the case; the Supreme Court decision in Kokesh v. SEC has not altered that. If it quacks like a duck …

[1] United States Supreme Court, Argued April 18, 2017 — Decided June 5, 2017.

[2] 823 F.3d 1357 (2016)

[3] 1992-93 CILR 605 (Grand Court of the Cayman Islands).

[4] HCVAP 2008/012 (Court of Appeal Court of Appeal of St. Christopher & Nevis).

[5] There was no sufficient connection between Millennium Nevis and the United States having regard to the fact that Millennium Nevis was incorporated in Nevis, it was not a party to or defendant in the U.S. action; there was no evidence that it conducted business in the United States or that it submitted itself to United States jurisdiction.

[6] [1975] 1 Ch 273.

[7] [2007] EWCA Civ 1374.

[8] 1994-95 CILR 546


This article was originally published on Law360 – please see link to the article here: https://www.law360.com/articles/939575