Post-Jarkesy, Should SEC Refund Its Ill-Gotten Penalties?

In a post last year on this blog, I noted the irony and unfairness of allowing federal agencies to keep millions (if not billions) of dollars they had illegally confiscated from private citizens based on claims that those private citizens had previously obtained those funds through their own wrongdoing.  In particular, I noted recent Supreme Court decisions that confirmed the complete illegality of most disgorgement judgments awarded to the Securities and Exchange Commission (see Lui v. SEC (2020)), and many similar disgorgement and “restitution” judgments awarded to the Federal Trade Commission (see AMG Capital Management v. FTC (2021)).

I facetiously asked whether the agencies might do the honorable thing and return their ill-gotten loot to those from whom they had confiscated it.  Of course, that never happened.

Well, here we go again.

Last month, in an amicus win for NCLA, the Supreme Court ruled in SEC v. Jarkesy that when the SEC demands civil penalties against alleged wrongdoers—and especially if the SEC alleges fraud—the case must be decided in an Article III court with a jury rather than in an agency tribunal with an administrative law judge or some other agency-employed adjudicator.  In essence, the ruling confirmed that the SEC for at least two decades has collected millions of dollars in penalties from private citizens and businesses that it had no lawful power to collect.

So what now happens to all those ill-gotten penalties the SEC illegally confiscated?  Shouldn’t the agency have to give it all back to the people and businesses who paid them?  After all, even the IRS has a process to seek refunds of certain tax penalties that were erroneously imposed, and in limited circumstances even where there was no error.  Indeed, in 2022, ostensibly as a form of pandemic relief, the IRS munificently issued $1.2 billion in refunds and credits to 1.6 million taxpayers who had been legitimately penalized for not filing their 2019 or 2020 tax returns on time.  The taxpayers didn’t even have to ask.

If the feds can proactively refund even lawfully collected tax penalties on that massive a scale, then refunding a much smaller number of unlawfully collected SEC penalties ought to be a piece of cake, not to mention the honorable thing to do.  Right?

Don’t count on it.  That’s not how the SEC rolls.  As best I can tell, the SEC didn’t refund a single penny of illegally extracted penalties after the Supreme Court unanimously ruled in Gabelli v. SEC (2013) that the agency’s penalty grabs were subject to a five-year statute of limitations.  Ditto after the Supreme Court unanimously ruled in Kokesh v. SEC (2017) that the agency’s disgorgement claims were subject to the same five-year statute of limitations.  Nor, as best I can tell, has the SEC returned any of the many millions of disgorgement dollars effectively deemed by Lui v. SEC (2021) to have been illegally confiscated by the agency over previous decades.  (Ditto for the Federal Trade Commission after the Supreme Court confirmed in AMG Capital Management v. FTC (2021) that the agency had unlawfully confiscated millions of dollars in disgorgement and restitution awards.)

To quote Mel Brooks, it’s good to be the king.  If anyone wants a refund of their illegally imposed SEC penalty, they’re almost certainly going to have to fight for it through litigation.  And that probably won’t be easy.

For starters, due to the SEC’s enormous leverage and other advantages, the vast majority of its enforcement targets eventually capitulate to penalty settlements rather than fighting the SEC’s charges.  Courts value finality and repose, and are understandably loath to allow litigants to undo or challenge such prior settlements, lest they open the floodgates to every litigant who develops buyer’s remorse after settling.  Moreover, SEC administrative settlements are infamous for their draconian waiver provisions, by which the agency demands, as a condition of settlement, that the settling litigant “voluntarily” sign away numerous statutory and constitutional rights, including the right to judicial review and even the right to speak or write critically about the SEC’s case against them.

Even for those who didn’t settle, another obstacle is the passage of time.  Any refund claim would likely be filed as an “illegal exaction” claim under the Tucker Act or the “Little Tucker Act,” and would likely be subject to a six-year statute of limitations.  As I’ve written before, other than in settled cases, the SEC largely stopped imposing administrative penalties around 2018, while the case of Lucia v. SEC was percolating before the Supreme Court, and the agency does not appear to have imposed any such penalties in any contested adjudications since then.  As a result, there are likely few (if any) non-settling SEC targets who paid an administrative penalty within the past six years.

You might think our government would do the honorable thing and voluntarily refund illegally confiscated penalties without putting up a fight.  Well, think again.

July 23, 2024