July 20, 2020

Last week, the United States Court of Appeals for the Fourth Circuit issued a significant ruling that a business owner who made a $4.5 million disgorgement deal with the SEC to resolve civil fraud claims cannot escape subsequent criminal charges that stemmed from the SEC's civil action. The accusation was relatively straightforward: the defendant was accused of misleading investors. The defendant sought to dismiss the indictment, arguing that the $4.5M disgorgement was a criminal penalty, but the Fourth Circuit concluded that the disgorgement obtained by the SEC in the civil suit does not constitute a criminal penalty to invoke the double jeopardy clause. 

On one hand, this ruling is not necessarily unexpected—or unprecedented. The court noted, among other things, that every other circuit court has concluded disgorgement in an SEC action is not a criminal penalty pursuant to the double jeopardy clause. But on the other hand, this ruling is significant in light of the U.S. Supreme Court’s 2017 ruling in Kokesh v. SEC. There, the Supreme Court held that disgorgement is subject to a five-year statute of limitations on civil penalties and suggested that disgorgement could be a penalty for statute of limitations purposes, in turn rendering it a criminal penalty and subject to double jeopardy. 

Ultimately, this case shines light on the waiver clauses found in civil SEC settlement agreements. The Government argued that the defendant actually forfeited his right to assert a double jeopardy claim in agreeing to the waiver clause in the consent agreement. The court disagreed because the waiver clause did not expressly state as such. But unfortunately for the defendant, the court then concluded that the disgorgement was indeed a civil penalty and not subject to double jeopardy.

Settlements with the SEC can have enormous consequences, both seen and unforeseen. Investigations and enforcement actions can drain companies and individuals of time, money, and more. When a settlement is on the horizon, it is tempting to sign for business certainty reasons.  It is recommended that all agreements be reviewed with counsel with an understanding of all collateral consequences.