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Post-Kokesh challenge to SEC disgorgement dismissed

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

U.S. District Court Judge F. Dennis Saylor IV in Boston granted the SEC's motion to dismiss the case filed by law firm Brown Rudnick on behalf of an F-Squared Investment Management liquidation trustee and others.

The lawsuit was filed in October, following a June 2017 Supreme Court ruling that put new limits on a common SEC strategy to recoup illegal profits from people found to have violated federal laws, known as disgorgement. In Kokesh vs. SEC, the justices unanimously said that because those are penalties, the SEC is bound by a five-year statute of limitations when seeking them. The SEC extracted almost $3 billion in disgorgement payments in 2016 — more than double what it collected in other types of penalties.

Mr. Saylor dismissed the lawsuit on several points raised, including whether District Courts can review SEC administrative orders. "The federal securities laws clearly do not grant District Courts jurisdiction to review SEC orders in administrative proceedings except in one narrow circumstance — to review temporary cease-and-desist orders — which is not present here," Mr. Saylor said in the order.

He also dismissed the plaintiffs' questioning of the SEC disgorgement process when judicial review is waived. "The fact that this claim has been repackaged under the heading of an (Administrative Procedures Act) claim does not exempt it from the exclusive channeling regime Congress prescribed," Mr. Saylor said.

Brown Rudnick officials declined to comment on the decision. Attorney Eleonora Zlotnikova with law firm Sam P. Israel, which has no connection to the case, said "in this case, the SEC appears to have had the statutory authority to pursue a disgorgement order and F-Squared voluntarily entered into a settlement agreement under that rubric, in which it waived judicial review. It's hard to see how the Kokesh ruling would have impacted the settlement, ex post facto, especially because nothing about the settlement appears to be contrary to the rule of law."