A 2017 decision from the U.S. Supreme Court has impeded Wall Street's top regulator from collecting more than $800 million in disgorgement of ill-gotten gains.
In June 2017, the Supreme Court unanimously decided that the SEC is subject to a five-year statute of limitations that prevents the agency from collecting on fraudsters' illegal gains made outside of the five-year window. The decision has since stopped the SEC's enforcement division from returning money to investors, particularly in cases of long-running fraud, SEC Enforcement Division co-Director Steven Peikin said May 16.
"We can't reach back beyond five years and pull money out of the pockets of wrongdoers and return it to investors," Peikin said during the House Financial Services Committee's capital markets, securities and investment subcommittee hearing.
The case in question was Kokesh v. SEC, in which the agency sued Charles Kokesh for misappropriating funds from four business development companies. The lower courts mandated that Kokesh pay back $34.9 million, but Kokesh argued that a portion of the gains fell outside of the five-year statute of limitations. With the Supreme Court's decision, Kokesh paid back only about $5 million, Peikin said.
The estimated lost collections totaling more than $800 million would have represented a significant amount of the SEC's total penalties and disgorgement collected. In fiscal year 2017, the SEC recorded a total of $3.8 billion in penalties and disgorgement and returned a record $1.07 billion to investors.
Lawmakers including Rep. Carolyn Maloney, D-N.Y., expressed interest during the hearing in crafting legislation that would extend the statute of limitations that the SEC operates under.
But in the meantime, the enforcement division is doubling down on its "efforts to uncover, investigate and bring cases as quickly as possible," according to prepared remarks for Peikin and Stephanie Avakian, also co-director of enforcement at the SEC.
"We'll have to act faster," Peikin said during the hearing. "But there will be cases where there's an ongoing fraud for years, and we won't discover it until some of that money is out of reach."