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Canadian class action litigators have the reputation of being more cautious than their neighbors to the south. It’s a reputation surely bolstered by a recent example of colossal chutzpah where acknowledged fraudsters launched an American securities class action to recover their ill-gotten gains.

The American Supreme Court seems to have stoked the fires when it published a tantalizing footnote in a recent securities law opinion, Kokesh v. SEC, 137 S. Ct. 1635 (2017). Kokesh was a unanimous opinion that held that disgorgement is a penalty, not an equitable remedy, and therefore subject to the ordinary 5-year statute of limitations for federal securities fraud actions. Inter alia, SCOTUS explained that disgorgement as collected by the SEC serves a penalty function because it is meant to sanction unscrupulous behavior (rather than compensate victims) and is paid to the U.S. Treasury. In a footnote, the Supreme Court warned that “[n]othing in this opinion should be  interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings”. Some creative American litigators seized on this crumb and are trying to knock down the weakened legal foundation of the disgorgement remedy.

For example, on October 26, 2017, a trustee of F-Squared, an investment management firm bankrupted by its shady dealings, sued the Securities and Exchange Commission on behalf of plaintiffs who made disgorgement payments to the SEC for securities fraud. The class is defined as “all persons or entities from whom the SEC has collected… purported disgorgement”. As one Bloomberg News commentator noted, this would probably include the storied company of infamous insider traders like Raj Rajaratnam and SAC Capital Advisors.

The claim was that in Kokesh, SCOTUS recognized that disgorgement is not a separate remedial claim, and therefore cannot be used to recover twice from the wrongdoer. Because statutory authority imposes a maximum on the amount of civil monetary penalties that may be assessed in securities fraud actions, any disgorgement that the SEC had collected in excess of the statutory minimums was an unauthorized fine. Therefore, as the plaintiffs put it, “the SEC routinely double-dipped” by collecting both disgorgement amounts and civil monetary penalties. The requested relief is a refund of the disgorgement that was paid to the SEC. Potential damages could reach as high as $14.9 billion. It will be interesting to see what the federal district court in Massachusetts makes of this bold claim.

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