Tag Archives: statutory interpretation

Supreme Court Holds 5-Year Statute of Limitations Applies to SEC Disgorgement

On June 5, 2017, by unanimous decision, the U.S. Supreme Court determined that disgorgement – a remedy that generated $3 billion in 2015 – is a “penalty” thereby subjecting it to the 5-year statute of limitations that applies to any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.” Kokesh v. SEC, No. 16-529, slip op. at 1 (June 5, 2017) (quoting 28 U.S.C. §2462). The Court’s decision relieved Kokesh of a $30 million disgorgement order entered in the lower court.

The SEC had argued that disgorgement is a different animal – it simply places the defendant in the same position as he or she would have been but for the offense. The Court strongly disagreed noting the deterrent qualities of disgorgement, which is a hallmark of a penalty, “[s]anctions imposed for the purpose of deterring infractions of public laws are inherently punitive.” Id. at 8. The Court observed that the victims (if there are any) of a securities law violation need not participate in the enforcement action and may not even support it. In addition, money that is disgorged to the Treasury often stays there; i.e., there is no absolute requirement that the money that is recovered be distributed to the purportedly aggrieved investors.

Going forward, the SEC is faced with having to speed up its investigations and charging decisions.  That can be a challenge, especially in complex cases where the Enforcement Division would prefer to thoroughly build out a case in advance.

Here is the decision:

https://www.supremecourt.gov/opinions/16pdf/16-529_i426.pdf

 

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Supreme Court To Decide Whether Government Must Prove That A Bank Fraud Defendant Intended To Defraud A Bank, As Opposed To Just Someone

On April 6, 2011, a jury convicted Kevin Loughrin of bank fraud and a number of other crimes relating to a scheme that he and an accomplice hatched in Utah to defraud some unsuspecting citizens and Target, the retail store.[1]  Loughrin and his accomplice dressed up like Mormon missionaries, went around to various homes, stole checks from people’s mailboxes, altered the checks, purchased items at Target, then returned the items to Target for cash.[2]  Loughrin made about $1,200 and was ultimately sentenced to 36 months in prison.[3]

At trial, his attorney tried to convince the Court that it should issue a jury instruction explaining to the jury that he could not be found guilty of bank fraud pursuant to 18 U.S.C. § 1344 unless the jury concluded that Loughrin had intended to defraud a financial institution, as opposed to simply intending to defraud someone.[4]  The trial court disagreed, citing precedent from the Tenth Circuit Court of Appeals, and issued an instruction requiring the Government to prove that Loughrin acted with “an intent to defraud” someone (e.g., Target, the account holders, etc.).  As noted above, the jury convicted Loughrin of bank fraud.  On appeal, the Court of Appeals upheld the trial court’s decision not to instruct the jury that, in order to convict under § 1344, the Government had to prove that Loughrin intended to defraud a bank.[5]

On December 13, 2013, the Supreme Court agreed to hear the case, Loughrin v. United States, in order to resolve a split among the federal circuit courts as to whether the U.S. Government must prove that a defendant intended to defraud a bank in order to secure a conviction for bank fraud under 18 U.S.C. § 1344(2).[6]  Specifically, the majority of federal circuit courts require the Government to prove beyond a reasonable doubt that the defendant intended to defraud a financial institution under both subsections of § 1344.[7]  The minority position, which is shared by the appeals court that decided the Loughrin case, is that the Government need only prove that the defendant intended to defraud someone for a § 1344(2) (obtaining property owned by, or under the control of, a bank) conviction.[8]

The Supreme Court will likely hear a variety of arguments in support of and against the majority position.  One rationale for that position is that the purpose of the statute is to “protect[] the federal government’s interest” in the financial integrity of federally chartered or insured banks. [9]  “Where the victim is not a bank and the fraud does not threaten the financial integrity of a federally controlled or insured bank, there seems no basis in the legislative history for finding coverage under [the statute].”[10]

Another rationale is that the expansive interpretation sought by the Government would federalize areas of crime normally prosecuted by state authorities.  This is a federalism argument rooted in an interpretation of the statute.  However, as seen in decisions across different topical areas and different Supreme Court eras, the appeal of such federalism arguments depends almost entirely on the composition and politics of the Supreme Court bench at a given point in time.

By contrast, a rationale for the Government’s position – that the state of mind required for a § 1344(2) conviction is an intent to defraud someone, bank or otherwise – is that the plain language of the two subsections of § 1344 show an intent to create two separate crimes: “[C]lause (1) focuses on the conduct as it affects the financial institution, while clause (2) emphasizes the conduct of the defendant.”[11]  “Indeed, the latter extends to any knowingly false representation by the defendant.”[12]  For liability under clause (2), the Government need only show that the defendant obtained or attempted to obtain bank property or property held by a bank with an intent to defraud someone else.[13]  Relatedly, because the target of the fraud need not be a bank, the Government need not prove that a bank was “at risk” for a loss.[14]

Whether Loughrin or the Government will carry the day and on which specific issues remains to be seen.  For example, the record is a bit unclear as to whether the issue of intent to defraud a bank is the only issue properly before the Court.  The Government has devoted a lot of its briefing to arguing that the issue of risk of loss to a bank was not preserved on appeal.  At a minimum, the Court will likely wrangle with the issue of resolving the circuit split on the issue of whether the Government need prove an intent to defraud, generally, or an intent to defraud a financial institution for subsection 2 liability.


[1] See U.S. v. Loughrin, 10-cr-00478-TC, Dkt. Nos. 3, 115 (D. Utah).

[2] See id.

[3] See id. at Dkt. Nos. 3, 150.

[4] See U.S. v. Loughrin, 710 F.3d 1111, 1115 (10th Cir. 2013) (discussing trial court decision).  Specifically, the Court found that there was no need to prove intent to defraud a bank with respect to subsection 2 of § 1344.  Section 1344 provides that it is a felony to knowingly execute, or attempt to execute, a scheme or artifice: (1) to defraud a financial institution; or (2) to obtain any … property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises.  18 U.S.C. § 1344.

[5] See id. at 1116.

[6] Loughrin v. United States, Dkt. No. 13-316.

[7] See e.g., U.S. v. Kendrick, 221 F.3d 19, 29 (1st Cir. 2000).

[8] See, e.g., Loughrin, 710 F.3d at 1116.

[9] See United States v. Rodriguez, 140 F.3d 163, 168 (2d Cir. 1998).

[10] See id.

[11] See Loughrin, 710 F.3d at 1116 (citations omitted).

[12] See id. (citation and internal quotations omitted).

[13] See id.

[14] In addition, the Government will likely argue before the Court that there is substantial case law across the federal circuits where convictions under § 1344(2) were upheld even though the bank in question is not the primary victim.