From Kevin LaCroix:
In the latest development in nearly decade-long legal battle, a New York intermediate appellate court has held in light of the U.S. Supreme Court’s 2017 decision in Kokesh v. SEC that amounts Bear Stearns paid under an SEC disgorgement order represent a “penalty” for which coverage is precluded under the bank’s insurance policy. This ruling, which overturned a trial court order holding that the disgorgement amount was covered, represents a substantial reversal of fortune for the claimants in this long-running and high-profile insurance coverage dispute. ...
The policy’s definition of “Loss” provides, in pertinent part that “Loss shall not include … fines or penalties imposed by law.” ...
In a September 20, 2018 opinion written by Judge Richard Andrias for a unanimous panel of the New York Supreme Court Appellate Division, First Department,the appellate court reversed the trial court’s holding, ruling in light of the U.S. Supreme Court’s June 2017 opinion in Kokesh v. Securities and Exchange Commission (here) that the disgorgement amount represented a “penalty” as a matter of law, and therefore did not represent covered loss under the policy. ...
The intermediate appellate court said, in light of Kokesh, the disgorgement amount is a “penalty” and therefore coverage is precluded — not as a matter of public policy, but as a matter of contract.
In my article, Kokesh Footnote Three Notwithstanding: The Future of the Disgorgement Penalty in SEC Cases, I analyzed Kokesh v. SEC where the Supreme Court held that disgorgement – a tool used by the SEC to recover ill-gotten gains through the courts – was a penalty rather than a remedy for the purposes of determining the appropriate statute of limitations. I contend that Kokesh raises questions about the validity of disgorgement as a sanction, especially considering issues of SEC authority, judicial power, and interstitial lawmaking. Stephen M. Bainbridge, Kokesh Footnote Three Notwithstanding: The Future of the Disgorgement Penalty in SEC Cases, 56 Wash. U. J. L. & Pol’y 017 (2018).
Disgorgement of ill-gotten gains long has been a basic tool in the Securities and Exchange Commission’s (SEC) penalty toolkit, despite a paucity of statutory authorization. Because disgorgement lacked a statutory framework, courts have had to flesh out the sanction via interstitial rulemaking. In Kokesh v. SEC, the US Supreme Court took up the seemingly technical—but surprisingly important—question of what statute of limitations applies to SEC disgorgement actions. More important, at least for present purposes, the Court’s opinion cast into doubt the validity of the seemingly well-established disgorgement sanction.
Earlier cases based the SEC’s authority to seek and the courts’ power to impose disgorgement on the claim that it is a form of equitable ancillary relief. If disgorgement is a penalty, however, courts lack that power and the SEC lacks that authority. This conclusion follows necessarily from the basic premise that there are no penalties in equity and the complete absence of any statutory authority to impose disgorgement as a legal sanction. Now that the Supreme Court has made clear that disgorgement is, in fact, a penalty, the future of the disgorgement penalty looks bleak.
