September 18, 2020

Volume X, Number 262

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4th Circuit: SEC Disgorgement Fine Does Not Trigger Double Jeopardy Protection

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.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume X, Number 202

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About this Author

Melissa S. Ho Shareholder Phoenix Antitrust, Antitrust - Health Care Compliance, Fraud and Abuse, Stark, Financial and Securities Litigation, Financial Technology, Regulation Government Investigations, Health Care Litigation
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Melissa Ho is a trial attorney with a detailed understanding of government regulations and business litigation. A former prosecutor, she is sympathetic to the disruption and chaos a government inquiry and criminal investigation can cause. 

Melissa defends individual clients against a wide variety of criminal allegations, including health care fraud, qui tam, RICO violations, bank fraud, real estate fraud, mortgage fraud, foreign corrupt practices, securities fraud, water and air quality violations, government corruption, procurement and public fraud, professional misconduct, civil...

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When a client turns to William Ezzell, they can expect an attorney keenly focused on learning who they are and what they do. He is genuinely passionate about understanding the intricacies unique to each client’s business, and how they view the world from their perspective. William combines this passion with his diverse practice history to further a collective goal: the best possible outcome. As a member of the firm’s Government Investigations and White Collar Defense Group, William devotes the majority of his practice to representing companies and individuals faced with white collar criminal matters, including the False Claims Act and the Anti-Kickback Statute. 

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