By Rodney F. Tonkovic, J.D.
The Supreme Court has denied certiorari for three securities-related petitions filed in late October and early November. The petitions, which are not related, all involved the SEC in some way, either directly or indirectly. The first challenged the amount of a penalty ordered in an SEC enforcement action. Another petition took issue with the SEC's interpretation of "control" in a regulation and went so far as to ask the Court to "finally" overturn Chevron. Finally, another defendant in an action brought by the SEC challenged the district court's refusal to modify the terms of his consent judgment after a Fair Fund was established and the consequence of his having to pay millions in capital gains taxes.
First, a petition brought by Donald J. Fowler asked the Court to take up two questions: whether the statute of limitations in Section 2462 can be waived and whether a civil penalty was overly punitive. In this case, the Second Circuit affirmed a district court's judgment that 28 U.S.C. § 2462 is non-jurisdictional and that the parties agreement tolling the statute of limitations was enforceable. The court also affirmed a civil penalty based on treating each defrauded victim as a separate violation.
Tolling the statute of limitations. In 2016, the Commission and Fowler had entered into two agreements tolling the five-year statute of limitations for one year. The Second Circuit panel disagreed, finding that the statute is jurisdictional and that the tolling agreement was enforceable. The petition acknowledges that no court has explicitly addressed the question, but argued nonetheless that the statute flatly prohibits district courts from "entertaining" suits after five years and that language like this has traditionally been construed as jurisdictional in nature and unwaivable. As Fowler would have it, the SEC's claim expired in 2016.
Excessive penalties? Fowler also argued that treating each defrauded customer as a separate violation contradicts not only the statutory cap on civil monetary penalties, but also the limitations of the Fifth and Eighth Amendments. According to Fowler, Exchange Act Section 21B(b) clearly implies that when multiple investors are affected, the appropriate remedy is to upgrade the penalty from second to third tier, not to multiply it for each investor.
Finally, the petition states that a civil penalty of over 18 times the disgorgement amount is well over the line of what the Court has in the past considered to be overly punitive fines and penalties in the context of the Fifth and Eighth Amendments.
Legal counsel as affiliate. The court also declined certiorari for a petition asking whether an attorney providing a legal opinion is an "affiliate" of an issuer as defined in Rule 144. In Hand v. U.S., a securities attorney convicted of securities fraud for his participation in a "pump and dump" scheme argued that liability under the antifraud provisions cannot exist if the purchasers are warned that a stock promotion is a scam; he maintained that this investment was actively touted as a pump-and-dump "chance to jump on a roller coaster." The petition also asserted that the attorney's position as pro bono legal counsel for the firms involved in the scheme did not make him a "control" person or "affiliate" of the issuers under Rules 144 and 405 and called for the Court to not defer to the SEC's interpretation of control in Rule 405. Finally, the petition took issue with the $1 million fine imposed on the attorney, contending that he produced evidence of his inability to pay. The SEC waived its right to respond on November 8, and the petition was distributed for the December 3, 2021 conference soon after.
Settlement as restitution. In one last matter involving the SEC, a petition challenging a district court's refusal to modify a consent decree was rejected. In Altahawi v. SEC, the petitioner entered into a consent judgment in 2019 with the SEC under which he disgorged over $21 million in sales proceeds from the unlawful sale of restricted shares. These proceeds were taxable in 2019 as capital gains to Altahawi, leaving him owing millions of dollars in taxes for money that never left his brokerage account. In April 2020, however, the SEC used Altahawi's settlement payment to establish a Fair Fund to distribute the money to investors, meaning that the disgorgement payment was now eligible for a tax deduction. The district court, however, declined to modify the judgment to add language required by the IRS Code that the payments were for restitution. The court reasoned that the possibility of a Fair Fund being established was contemplated at the time Altahawi consented to the judgment.
The petition argued that the district court, as affirmed by the Second Circuit, abused its discretion in refusing to modify the judgment. According to the petition, the establishment of a Fair Fund was a significant change in circumstances warranting reopening the judgment. Changing the judgment was also warranted because extraordinary circumstances warranted the change—that is, Altahawi owed millions of dollars in taxes. The district court's reasoning was an abuse of discretion, Altahawi said, because his disgorgement payment did not become eligible for a tax deduction until the Fair Fund was actually set up with the approval of the district court, regardless of what was contemplated when the original judgment was entered.
Read the Docket.These cases, and others before the Court may be referenced in the latest version of the Supreme Court Docket, a regular feature of Securities Regulation Daily. Issued opinions, granted petitions, pending petitions, and denied petitions are listed separately, along with a summary of the questions presented and the current status of each appeal.