Investor Protection and Capital Markets Fairness Act

Floor Speech

BREAK IN TRANSCRIPT

Mr. GREEN of Texas. Mr. Speaker, I move to suspend the rules and pass the bill (H.R. 4344) to amend the Securities Exchange Act of 1934 to allow the Securities and Exchange Commission to seek and Federal courts to grant disgorgement of unjust enrichment, and for other purposes, as amended.

The Clerk read the title of the bill.

The text of the bill is as follows: H.R. 4344

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, SECTION 1. SHORT TITLE.

This Act may be cited as the ``Investor Protection and Capital Markets Fairness Act''. SEC. 2. ADDITIONAL RELIEF.

(a) In General.--Section 21(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78u(d)) is amended by adding at the end the following:

``(7) Additional relief.--

``(A) In general.--In any action or proceeding brought or instituted by the Commission under any provision of the securities laws, the Commission may seek, and any Federal court may grant the following additional relief:

``(i) Disgorgement in the amount of any unjust enrichment obtained as a result of the act or practice with respect to which the Commission is bringing such an action or proceeding.

``(ii) Injunctions, including officer and director bars.

``(B) Rule of construction.--Additional relief sought under this paragraph may not be construed to be a civil fine, penalty, or forfeiture subject to chapter 163 of part VI of title 28, United States Code.

``(C) Statute of limitations.--A Federal court may not issue relief under this paragraph if the action or proceeding brought or instituted by the Commission was commenced more than 14 years after the alleged violation.''.

(b) Effective Date.--The amendment made by this section shall apply with respect to any actions or proceedings pending or commenced on or after the date of the enactment of this section.

(c) Report.--

(1) In general.--Not later than 10 years after the date of the enactment of this Act, the Securities Exchange Commission shall submit to Congress data about each enforcement action brought by the Commission in the 10 years following the date of the enactment of this Act.

(2) Contents.--In submitting data pursuant to paragraph (1), the Commission shall--

(A) with regard to each enforcement action--

(i) categorize the type of enforcement action;

(ii) categorize the type of issuer involved in the enforcement action;

(iii) identify the approximate duration of the misconduct that gave rise to the enforcement action; and

(iv) identify the approximate duration of the investigation; and

(B) identify the 10 enforcement actions with the longest durations of misconduct that gave rise to enforcement actions. SEC. 3. DETERMINATION OF BUDGETARY EFFECTS.

The budgetary effects of this Act, for the purpose of complying with the Statutory Pay-As-You-Go Act of 2010, shall be determined by reference to the latest statement titled ``Budgetary Effects of PAYGO Legislation'' for this Act, submitted for printing in the Congressional Record by the Chairman of the House Budget Committee, provided that such statement has been submitted prior to the vote on passage.

Mr. Speaker, I rise in strong support of H.R. 4344.

I would like to start by commending my colleagues, Representatives McAdams and Huizenga, for crafting this bipartisan solution to a problem that, in just 2 years, has cost investors approximately $1.1 billion.

In 2017, the Supreme Court, in Kokesh v. SEC, held that the authority of the Securities and Exchange Commission, SEC, to recover for investors the wrongful gains of securities law violators, known as disgorgement, is effectively a penalty. As a result, the SEC's authority to obtain disgorgement is time limited by the general Federal statute of limitations for penalties so that the SEC must bring its case within 5 years of the violation.

This ruling was a boon to white-collar criminals like Bernie Madoff and Allen Stanford, who are now able to defraud investors for a decade and keep their profits.

Even worse, the SEC is currently in litigation before the Supreme Court over whether it even has the authority to obtain disgorgement for investors.

I am pleased that H.R. 4344 would ensure that the SEC has the tools it needs to hold bad actors accountable and to return funds to harmed investors by clarifying that the SEC does indeed have disgorgement authority, and its authority reasonably extends to 14 years following the date of violation. This longer time limit would ensure that the SEC has enough time to detect and sue the Bernie Madoffs of the world.

BREAK IN TRANSCRIPT

Mr. GREEN of Texas. Mr. Speaker, I submit for the Record a letter on this legislation from the Chair of the SEC, Mr. Clayton. United States Securities and Exchange Commission, Washington, DC, November 17, 2019. Re H.R. 4344, the Investor Protection and Capital Markets Fairness Act. Hon. Nancy Pelosi, Speaker, House of Representatives, Washington, DC. Hon. Kevin McCarthy, Republican Leader, House of Representatives, Washington, DC.

Dear Speaker Pelosi and Leader McCarthy, I write concerning the importance to our investors and our markets of the Securities and Exchange Commission's (SEC or Commission) authority to seek disgorgement of unjust enrichment from those who have violated the federal securities laws. This authority is particularly important in circumstances where retail investors have been the victims of long-running, well- concealed frauds, including Ponzi schemes. For these victims, an action by the SEC seeking disgorgement may be the only practical means of recourse.

The recent Supreme Court decision in Kokesh v. SEC, 137 S. Ct. 1635 (2017), significantly limited the SEC's authority to seek disgorgement. In Kokesh, the Supreme Court found our use of the disgorgement remedy operated as a penalty, which subjected that remedy to a five-year statute of limitations from the date of the misconduct. As a result, our ability to address well-concealed frauds has been significantly restricted, including in situations where our Main Street investors need us most. More recently, the SEC's ability to seek disgorgement in any district court action has been questioned.

With deference to your judgment regarding the appropriate length for the statute of limitations and other terms, I respectively request that you act to ensure that we are able to seek disgorgement to the extent appropriate to protect our investors and our markets. Prompt congressional action also would remove the uncertainty regarding our general authority to seek disgorgement in district court.

Fortunately, the U.S. House of Representative is considering H.R. 4344, the Investor Protection and Capital Markets Fairness Act, which would amend the Securities Exchange Act of 1934 to explicitly provide the Commission with authority to seek disgorgement of unjust enrichment in district courts. I greatly appreciate this bipartisan, bicameral work underway to address this important issue and welcome the opportunity to continue to work with Congress to ensure defrauded retail investors can get their investment dollars back while being true to the principles embedded in statutes of limitations. Importance of Disgorgement as a Remedy

The SEC's longstanding ability to obtain disgorgement of ill-gotten gains in federal district court is an important tool for our enforcement program and has allowed the agency to return billions of dollars to innocent investors victimized by perpetrators of fraud. For many--if not most-- of these victims, disgorgement awards in SEC cases are the only practical way to recoup what was stolen from them. The Commission is committed to returning money to harmed investors promptly and has worked hard to improve the effectiveness of our distribution program over recent years. Since the beginning of Fiscal Year 2017, the hard work of the women and men of the SEC has led to the return of over $3 billion to harmed investors. Impact of Kokesh on Main Street Investors

Notwithstanding these successes, the Supreme Court's decision in Kokesh has impacted the SEC's ability to return funds fraudulently taken from Main Street investors. In Kokesh, the Supreme Court found our use of the disgorgement remedy operated as a penalty, which subjected the Commission's ability to seek disgorgement of ill-gotten gains to a five-year statute of limitations.

The Kokesh case itself highlights this problem in stark terms. Of the $34.9 million that Charles Kokesh misappropriated, $29.9 million fell outside of the 5-year statute of limitations. The SEC was unable to collect that $29.9 million from him for distribution to his victims, who largely consisted of small-dollar Main Street investors.

Overall, since Kokesh was decided, at least $1.1 billion in ill-gotten gains has been unavailable for possible distribution to harmed investors. Much of this is tied to losses by investors. Importance of Statutes of Limitations

The SEC's authority to seek disgorgement should not be unbounded. I agree that statutes of limitations serve important functions in our legal system, and as a general matter, our remedial authority should be subject to reasonable limitations periods. However, as I look across the scope of misconduct we encounter, including most notably Ponzi schemes and affinity frauds, I believe a period longer than five years from the date of the misconduct is appropriate in various circumstances. This is especially the case in our private, retail markets where there are fewer causes of action and safeguards available compared to the public capital markets. Further, we often see fraudsters target certain categories of investors. These investors-- notably teachers, military service personnel, the elderly, and religious-affiliated groups--need and deserve legal protection and the SEC's attention, particularly in the case of private, targeted frauds.

H.R. 4344, the Investor Protection and Capital Markets Fairness Act

H.R. 4344 would address two important issues. First, the bill addresses the result of the Supreme Court's ruling in Kokesh that SEC disgorgement claims are subject to a five- year statute of limitations. The Court's holding has had the anomalous effect of allowing the most ``successful'' perpetrators of fraud--those who prevent the discovery of their schemes for longer than the limitations period--to keep their ill-gotten gains. H.R. 4344 will ensure that sophisticated fraudsters who carry out some of the most harmful frauds, including Ponzi schemes that can defraud investors for long periods of time before being uncovered, cannot keep their victims' money.

Second, some perpetrators of fraud have tried to keep their ill-gotten gains arguing that district courts lack the power to order disgorgement in any Commission action. The primary objective of disgorgement is to return circumstances to the pre-fraud status quo. The Supreme Court recently granted certiorari to address this question in Liu v. SEC, No. 18- 1501. H.R. 4344 would confirm and ratify district courts' authority to do what they have been doing for decades--order violators to surrender the money they obtained by breaking the securities laws so that victims have a chance to be compensated.

H.R. 4344 is an important response to real harms suffered by innocent victims of the worst types of securities frauds. These are frauds that undermine the public confidence in our markets that the 4,400 women and men of the SEC strive to preserve every day.

Thank you for your continuing commitment to America's investors and our markets. Very truly yours, Jay Clayton, Chairman.

BREAK IN TRANSCRIPT

Mr. GREEN of Texas. Maloney), who happens to be the chairperson of the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets.

Mrs. CAROLYN B. MALONEY of New York. Mr. Speaker, I thank the gentleman for yielding and for his leadership on this issue and so many others.

I want to thank Mr. McAdams for all of his work on this crucial issue. I also want to thank Ranking Member Huizenga, who has been a leader on this issue for a long time. And I want to thank the chairwoman and the ranking member for getting this bipartisan deal done.

Proper enforcement of the securities laws helps maintain investor confidence in our markets. Investors need to know that if a bad actor is caught, and the SEC proves that the bad actor committed fraud, then the investors will get their money back.

Unfortunately, the 2017 Supreme Court decision in Kokesh versus SEC significantly damaged the SEC's ability to return funds to harmed investors, by holding that SEC claims for disgorgement of ill-gotten profits are subject to a 5-year statute of limitations. This means that for long-running frauds like Bernie Madoff's Ponzi scheme, the SEC would not be able to claw back all of the bad actor's profits.

The Kokesh decision has already cost investors about $900 million in disgorgement of illegal profits according to the SEC.

Mr. McAdams' bill would fix this issue and would lengthen the statute of limitations from 5 years to 14 years. This is only fair. So I strongly urge a ``yes'' vote on this bill that my colleagues on both sides of the aisle support, which will claw back bad actor's money and put money back in investors' pockets.

I, too, urge support of this bill, specifically because it would protect the SEC's longstanding authority to recover for investors the unjust enrichment from defendants and set a reasonable time limit to do so. I yield back the balance of my time.

BREAK IN TRANSCRIPT

Source