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  2. REGULATION AND LEGISLATION
October 27, 2017 01:00 AM

SEC disgorgement practices challenged in lawsuit

Hazel Bradford
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    Bloomberg

    A class-action lawsuit challenging the Securities and Exchange Commission's statutory authority to collect fines and penalties was filed Thursday.

    The lawsuit, which was filed in U.S. District Court in Boston by international law firm Brown Rudnick on behalf of an F-Squared Investment Management liquidation trustee and others, is seeking the return of as much as $15 billion in penalties.

    It follows a Supreme Court ruling June 5 that put new limits on a common SEC strategy to recoup illegal profits from people found to have violated federal laws, known as disgorgement. Because those are penalties, the justices unanimously said the SEC is bound by a five-year statute of limitations when seeking them.

    Brown Rudnick filed an amicus brief in the Supreme Court case, Kokesh vs. SEC.

    "Hopefully, what this means is that the SEC is going to be required by courts to stay in their lane and not seek remedies without the proper statutory authority," said Brown Rudnick partner Alex Lipman, a former SEC enforcement division chief, in an interview.

    Brown Rudnick partner Justin S. Weddle said the case could have a far-reaching impact. "The point of our case is that executive branch agencies aren't allowed to collect money without statutory authority," Mr. Weddle said in the same interview.

    The SEC extracted almost $3 billion in disgorgement payments in 2016 — more than double what it collected in other types of penalties.

    Lead plaintiff Craig Jalbert is the liquidating trustee for F-Squared Investment Management, which paid $30 million in disgorgements that the SEC was not authorized to collect, the lawsuit alleges.

    F-Squared agreed in December 2014 to pay $35 million to settle SEC charges that it made false claims about the performance of its flagship investment product, including a $5 million fine and $30 million in disgorgement. According to the settlement, F-Squared routinely promoted seven years of pre-2008 results for its AlphaSector strategy, despite launching the product that year. The results were hypothetical and miscalculated in a way that made them look more favorable.

    The SEC declined to comment on the lawsuit.

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