1 00:00:00,600 --> 00:00:05,360 Speaker 1: This is Bloomberg Law with June Grosso from Bloomberg Radio. 2 00:00:05,760 --> 00:00:08,520 Speaker 1: The Supreme Court appears ready to limit the Securities and 3 00:00:08,560 --> 00:00:13,039 Speaker 1: Exchange Commission's ability to recoup ill gotten profits from wrongdoers. 4 00:00:13,080 --> 00:00:16,040 Speaker 1: That's after arguments on a legal tool the Commission has 5 00:00:16,160 --> 00:00:19,800 Speaker 1: used to collect billions of dollars every year. Yesterday, the 6 00:00:19,880 --> 00:00:23,840 Speaker 1: Justice is considered the SEC's use of disgorgement to collect 7 00:00:23,840 --> 00:00:27,360 Speaker 1: money from someone. The Commission sues in federal court. Joining 8 00:00:27,400 --> 00:00:30,240 Speaker 1: me is. John Coffee, a professor at Columbia Law School, 9 00:00:30,720 --> 00:00:35,960 Speaker 1: explain the SEC's use of disgorgement. The issue is whether 10 00:00:36,159 --> 00:00:42,000 Speaker 1: the SEC can grant disgorgement and what does discouragement actually mean. 11 00:00:42,680 --> 00:00:47,400 Speaker 1: The SEC is empowered by Congress to grant equitable remedies 12 00:00:47,479 --> 00:00:51,440 Speaker 1: when they find a violation. In this specific case, the 13 00:00:51,640 --> 00:00:55,800 Speaker 1: SEC found that the two defendants were running something similar 14 00:00:55,840 --> 00:00:58,080 Speaker 1: to a Ponzi scheme and taking lots of money in. 15 00:00:58,640 --> 00:01:02,600 Speaker 1: They took in twenty seven million to build a cancer center, 16 00:01:02,960 --> 00:01:06,200 Speaker 1: and they walked off with eight million dollars of the 17 00:01:06,280 --> 00:01:10,600 Speaker 1: proceeds and built nothing. Should they be liable for all 18 00:01:10,680 --> 00:01:13,720 Speaker 1: the twenty seven they took in, or only for the 19 00:01:13,800 --> 00:01:17,080 Speaker 1: eight million profit that they made, they did spend money 20 00:01:17,200 --> 00:01:21,120 Speaker 1: legitimately on trying to construct the center. The parties disagree 21 00:01:21,160 --> 00:01:25,199 Speaker 1: on what discouragement means, and the defendants are actually saying 22 00:01:25,560 --> 00:01:29,759 Speaker 1: there's no authority at all to a grant discouragement. It's 23 00:01:29,920 --> 00:01:33,800 Speaker 1: pretty likely, based on the argument that we heard yesterday, 24 00:01:33,840 --> 00:01:37,920 Speaker 1: that the court may want to limit what discoorgement means 25 00:01:38,000 --> 00:01:41,480 Speaker 1: and may want to require that discouragement applies only to 26 00:01:41,760 --> 00:01:46,160 Speaker 1: funds that are returned by the SEC to investors. That 27 00:01:46,280 --> 00:01:49,680 Speaker 1: was what got the most discussion yesterday. What was the 28 00:01:49,720 --> 00:01:53,880 Speaker 1: basis of their argument that this is an illegal punishment. 29 00:01:54,240 --> 00:01:57,440 Speaker 1: The defendants are saying, nowhere in the statute does it 30 00:01:57,560 --> 00:02:01,520 Speaker 1: say the SEC is entitled to grant escoorgement. There is 31 00:02:01,560 --> 00:02:06,080 Speaker 1: a reference instead in several bills that the SEC can 32 00:02:06,120 --> 00:02:11,000 Speaker 1: seek equitable remedies for violations and the securities laws historically 33 00:02:11,440 --> 00:02:15,480 Speaker 1: discouragement was an equitable remedy. But there's still a question 34 00:02:15,520 --> 00:02:18,600 Speaker 1: of what it means. It certainly means that you can 35 00:02:18,720 --> 00:02:22,880 Speaker 1: seek the return of the ill gotten gain. What was 36 00:02:22,960 --> 00:02:26,840 Speaker 1: the gain that the defendant received? And you can also 37 00:02:27,400 --> 00:02:30,960 Speaker 1: interpret the provision to say that money should be returned 38 00:02:31,000 --> 00:02:34,680 Speaker 1: by the government to the injured victims and not simply 39 00:02:34,720 --> 00:02:37,720 Speaker 1: placed in the federal treasury. So those are the two 40 00:02:37,800 --> 00:02:40,720 Speaker 1: issues that the courts seemed to be most interested in yesterday. 41 00:02:41,280 --> 00:02:45,799 Speaker 1: Now has the discouragement remedy sort of grown over time 42 00:02:46,080 --> 00:02:49,320 Speaker 1: or goes back to the Texas Gulf Sulfuric's case about 43 00:02:50,880 --> 00:02:55,480 Speaker 1: But Congress since then did pass legislation expressly stating that 44 00:02:55,560 --> 00:02:59,919 Speaker 1: the Commission can grant equitable remedies. A federal court can 45 00:03:00,080 --> 00:03:03,720 Speaker 1: grant equival remedies at the request of the Commission. And 46 00:03:03,800 --> 00:03:06,120 Speaker 1: the numbers here are quite large. If we look just 47 00:03:06,240 --> 00:03:10,280 Speaker 1: at two thousand ten to two thousand eighteen, it's almost 48 00:03:10,360 --> 00:03:14,760 Speaker 1: ten billion dollars in discouragement if the SEC has recovered. 49 00:03:15,080 --> 00:03:17,720 Speaker 1: So this is an awful lot of money, and there 50 00:03:17,800 --> 00:03:19,840 Speaker 1: is some debate about whether more of it should go 51 00:03:19,880 --> 00:03:22,800 Speaker 1: back to the investors, but most of it does. In 52 00:03:22,840 --> 00:03:26,920 Speaker 1: this case, the plaintiff said that the trial judge had 53 00:03:27,000 --> 00:03:30,680 Speaker 1: found that they made an eight million dollar profit, but 54 00:03:30,800 --> 00:03:36,240 Speaker 1: the SEC set the discouragement amount at seven. Well, again, 55 00:03:36,280 --> 00:03:39,440 Speaker 1: the numbers that I gave you are the actual numbers. 56 00:03:39,840 --> 00:03:43,840 Speaker 1: The total amount that investors lost was twenty seven million. 57 00:03:44,360 --> 00:03:46,640 Speaker 1: The total amount that could be seen as a real 58 00:03:46,800 --> 00:03:51,400 Speaker 1: profit retained by the defendants was about eight to nine million, 59 00:03:51,640 --> 00:03:54,280 Speaker 1: one third of that in other words, and the issue 60 00:03:54,360 --> 00:03:57,840 Speaker 1: here is whether the court, under the remedy of discouragement, 61 00:03:58,160 --> 00:04:01,600 Speaker 1: can require the return of only seven million or only 62 00:04:01,680 --> 00:04:04,560 Speaker 1: the eight or nine million dollar profit. And the court 63 00:04:04,840 --> 00:04:08,040 Speaker 1: was very concerned about that issue, and they're also very 64 00:04:08,040 --> 00:04:10,080 Speaker 1: concerned about whether this money had to go back to 65 00:04:10,120 --> 00:04:14,360 Speaker 1: the investors. Both the liberal and the conservative justices seemed 66 00:04:14,400 --> 00:04:19,279 Speaker 1: to question how they could narrow the remedy without quashing it. Again. 67 00:04:19,400 --> 00:04:22,080 Speaker 1: One way you could narrow to say it's only the 68 00:04:22,120 --> 00:04:26,040 Speaker 1: ill gotten gain and not the total receipts. These investors 69 00:04:26,040 --> 00:04:28,719 Speaker 1: were arguably defrauded out of twenty seven million, that's what 70 00:04:28,800 --> 00:04:31,839 Speaker 1: they paid in, but the ill gotten gain, the profit 71 00:04:31,880 --> 00:04:34,839 Speaker 1: to the defendants was the smaller amount eight to nine million. 72 00:04:35,400 --> 00:04:38,480 Speaker 1: And also there is concern about whether this money should 73 00:04:38,520 --> 00:04:41,560 Speaker 1: be kept by the government or restored by the sec 74 00:04:41,800 --> 00:04:44,960 Speaker 1: to the injured investors. So the Supreme Court could come 75 00:04:45,000 --> 00:04:48,000 Speaker 1: out with a ruling saying that you have to limit 76 00:04:48,480 --> 00:04:51,960 Speaker 1: the amount of discouragement and it has to go to victims. 77 00:04:52,560 --> 00:04:55,560 Speaker 1: That's the way the arguments seemed to go yesterday. That is, 78 00:04:55,960 --> 00:04:58,800 Speaker 1: while the defendants were saying they had no authority at all, 79 00:04:58,920 --> 00:05:01,279 Speaker 1: and in the whole case you be thrown out. It 80 00:05:01,360 --> 00:05:03,839 Speaker 1: sounded much more like the court was only wanting to 81 00:05:03,880 --> 00:05:07,599 Speaker 1: talk about lessening the measure of damages to the actual 82 00:05:07,640 --> 00:05:11,200 Speaker 1: ill gotten gain and not the total receipts, and also 83 00:05:11,640 --> 00:05:15,320 Speaker 1: mandating more strongly that this is a remedy designed to 84 00:05:15,480 --> 00:05:19,120 Speaker 1: recover funds for the injured investors and not for the government. 85 00:05:19,600 --> 00:05:22,560 Speaker 1: Just say the court said the SEC can't do this 86 00:05:22,640 --> 00:05:25,120 Speaker 1: at all. What would happen if you see, would at 87 00:05:25,120 --> 00:05:28,640 Speaker 1: that point be powerless. They would be really toothless because 88 00:05:28,960 --> 00:05:32,280 Speaker 1: the penalties that they can receive, the actual penalties fines 89 00:05:32,400 --> 00:05:36,839 Speaker 1: for misconduct are much smaller than the discouragement amount they received. 90 00:05:37,120 --> 00:05:40,560 Speaker 1: In a typical year like two nineteen, the amount of 91 00:05:40,560 --> 00:05:44,240 Speaker 1: money they received as discoursement was three times the amount 92 00:05:44,279 --> 00:05:47,679 Speaker 1: of money they got as penalties. The penalties were passed 93 00:05:47,720 --> 00:05:51,039 Speaker 1: many years ago and there have been trivialized by inflation, 94 00:05:51,400 --> 00:05:54,480 Speaker 1: whereas discouragement allows you to get the entire ill gotten 95 00:05:54,520 --> 00:05:57,760 Speaker 1: game and you can debate what that means. So the 96 00:05:57,880 --> 00:06:02,560 Speaker 1: SEC would probably have their ability to recover financial penalties 97 00:06:02,560 --> 00:06:05,760 Speaker 1: and to term misconduct reduced by about two thirds and 98 00:06:05,839 --> 00:06:09,080 Speaker 1: already there are bipartisan bills in Congress to restore that 99 00:06:09,160 --> 00:06:12,440 Speaker 1: authority if the Supreme Court strikes it down. Does this 100 00:06:12,520 --> 00:06:16,719 Speaker 1: seem like one instance where the conservative justices and the 101 00:06:16,800 --> 00:06:20,360 Speaker 1: liberal justices were almost on the same page. They were 102 00:06:20,400 --> 00:06:23,960 Speaker 1: pretty close. I think they both were saying, we've talked 103 00:06:24,040 --> 00:06:27,360 Speaker 1: very loosely about discourse. Let's focus what it means, and 104 00:06:27,440 --> 00:06:30,120 Speaker 1: if it means the ill gotten game, that means less 105 00:06:30,160 --> 00:06:32,680 Speaker 1: than all the money you received. We'll have to see 106 00:06:32,720 --> 00:06:35,159 Speaker 1: how they write this, but I think they were looking 107 00:06:35,200 --> 00:06:39,280 Speaker 1: for an intermediate solution that wouldn't leave the sec effectively 108 00:06:39,320 --> 00:06:42,840 Speaker 1: without any real sanction. Jack, Let's turn to another business 109 00:06:42,920 --> 00:06:46,719 Speaker 1: case the Justice is heard yesterday involving the Consumer Financial 110 00:06:46,720 --> 00:06:51,039 Speaker 1: Protection Bureau. The Justice is considered whether Congress went too 111 00:06:51,040 --> 00:06:54,720 Speaker 1: far and trying to insulate the agency from political pressure. 112 00:06:55,240 --> 00:07:02,000 Speaker 1: Explain the argument that the agency's set up is unconstitutional. Essentially, uh, 113 00:07:02,080 --> 00:07:05,279 Speaker 1: The argument is that the statute the Dot Frank Act, 114 00:07:05,320 --> 00:07:10,280 Speaker 1: which created the Consumer Financial Protection Bureau, vested the sole 115 00:07:10,440 --> 00:07:14,160 Speaker 1: director of that agency with so much authority and such 116 00:07:14,200 --> 00:07:19,080 Speaker 1: immunity from presidential removal that it offends the separation of 117 00:07:19,120 --> 00:07:23,840 Speaker 1: powers doctrine, which the Constitution mandates. Separation of powers means 118 00:07:23,880 --> 00:07:27,320 Speaker 1: that each of the three branches, the executive, the legislative, judicial, 119 00:07:27,640 --> 00:07:31,000 Speaker 1: have powers that the others can invade. Under this Dot 120 00:07:31,040 --> 00:07:34,520 Speaker 1: Frank Act, the President can only remove the director of 121 00:07:34,600 --> 00:07:38,760 Speaker 1: the CFPB for costs, and that means that person serves 122 00:07:38,800 --> 00:07:42,480 Speaker 1: a five year term. And as the planeffs keep pointing 123 00:07:42,480 --> 00:07:45,160 Speaker 1: out in the era, in the event that there was 124 00:07:45,200 --> 00:07:49,800 Speaker 1: a democratic elected president in this election, he would be 125 00:07:49,880 --> 00:07:54,320 Speaker 1: unable to remove the director of the CFPB before two 126 00:07:54,400 --> 00:07:58,320 Speaker 1: thousand and twenty three, and that's a significant inroad on 127 00:07:58,560 --> 00:08:03,160 Speaker 1: the president's authority. Now, it's not that different from other agencies, 128 00:08:03,200 --> 00:08:06,120 Speaker 1: but other agencies don't have a sole director, and they're 129 00:08:06,160 --> 00:08:10,520 Speaker 1: all responsive to Congress, which funds them. The CFPB instead 130 00:08:10,640 --> 00:08:14,120 Speaker 1: gets funded by the Federal Reserve, and the President can 131 00:08:14,160 --> 00:08:17,520 Speaker 1: only remove its director for cause, and that may make 132 00:08:17,560 --> 00:08:23,520 Speaker 1: that agency more independent than the Constitution really contemplates. The 133 00:08:23,600 --> 00:08:26,560 Speaker 1: real issue here, The real issue is not whether the 134 00:08:26,600 --> 00:08:30,520 Speaker 1: CFPB is invalid, but what are this limited power of 135 00:08:30,560 --> 00:08:34,400 Speaker 1: removal has to be struck down so that you eliminate 136 00:08:34,559 --> 00:08:37,439 Speaker 1: that provision and sever it from the rest of the statute. 137 00:08:37,920 --> 00:08:40,520 Speaker 1: And that's very likely the way that the Chief Justice 138 00:08:40,520 --> 00:08:43,360 Speaker 1: will go and he's probably the swing vote on this. Jack, 139 00:08:43,760 --> 00:08:46,520 Speaker 1: what about the Federal Reserve Board of Governors. They have 140 00:08:46,720 --> 00:08:49,880 Speaker 1: set terms and they're not funded by the Reserve Board 141 00:08:49,880 --> 00:08:53,280 Speaker 1: of Governors, which funds the CFPB is also a body 142 00:08:53,320 --> 00:08:57,160 Speaker 1: that's outside the normal separation of powers. It's not really 143 00:08:57,240 --> 00:09:00,280 Speaker 1: responsive to the president. He has limited authority over the 144 00:09:00,320 --> 00:09:03,000 Speaker 1: Congress doesn't have control over them, And the fact that 145 00:09:03,080 --> 00:09:07,280 Speaker 1: they have control over the cfp B still doesn't make 146 00:09:07,320 --> 00:09:11,280 Speaker 1: the CFP part of our normal constitutional structure. At least 147 00:09:11,360 --> 00:09:14,599 Speaker 1: that's the argument for those who want to enhance and 148 00:09:14,760 --> 00:09:18,160 Speaker 1: beef up the separation of powers clause. So you think 149 00:09:18,200 --> 00:09:23,040 Speaker 1: that they won't declare the CFPB is unconstitutional. I think 150 00:09:23,080 --> 00:09:26,200 Speaker 1: the likelihood is given on prior votes of some of 151 00:09:26,240 --> 00:09:31,800 Speaker 1: these judgices. Justice Kavanaugh has twice found the CFPB be unconstitutional, 152 00:09:32,160 --> 00:09:34,240 Speaker 1: so I think he and some of his colleagues would 153 00:09:34,280 --> 00:09:38,319 Speaker 1: find that it is already unconstitutional. But I think the 154 00:09:38,400 --> 00:09:41,680 Speaker 1: Chief Justice will say the issue is only whether or 155 00:09:41,720 --> 00:09:45,679 Speaker 1: not this limited removal of its director can stand up 156 00:09:45,720 --> 00:09:48,559 Speaker 1: to the separation of powers clause, and if it cannot, 157 00:09:48,679 --> 00:09:51,520 Speaker 1: if that crosses the line, we can just sever that 158 00:09:51,600 --> 00:09:54,160 Speaker 1: provision and strike it down and leave the rest of 159 00:09:54,160 --> 00:09:59,360 Speaker 1: the agency unchanged. The Chief Justice is frequently saying that 160 00:09:59,559 --> 00:10:02,920 Speaker 1: the Court is above partisan politics, But wouldn't they be 161 00:10:02,960 --> 00:10:06,800 Speaker 1: intruding on the political branch with this decision. I'm sure 162 00:10:06,880 --> 00:10:11,240 Speaker 1: some will feel that, But remember even the Democrats are 163 00:10:11,240 --> 00:10:14,560 Speaker 1: a little nervous about having someone running that agency who 164 00:10:14,679 --> 00:10:18,520 Speaker 1: right now is closely associated with Donald Trump and running 165 00:10:18,559 --> 00:10:21,440 Speaker 1: it for three years into the term of our next president, 166 00:10:21,640 --> 00:10:25,560 Speaker 1: who probably wants to activate the CFPB and couldn't do 167 00:10:25,720 --> 00:10:29,000 Speaker 1: so if the person serving that office could only be 168 00:10:29,040 --> 00:10:31,440 Speaker 1: removed for courts, which really means you've got to find 169 00:10:31,679 --> 00:10:36,200 Speaker 1: criminal or moral misconduct. Is the Court's decision likely to 170 00:10:36,240 --> 00:10:40,679 Speaker 1: have an impact on the structure of other independent agencies. Well, 171 00:10:40,720 --> 00:10:44,720 Speaker 1: they've done this before. About five years ago, they took 172 00:10:44,720 --> 00:10:48,400 Speaker 1: another federal agency, the p c a o B, the 173 00:10:48,480 --> 00:10:52,080 Speaker 1: Public Company Accounting Oversight Board, and said that the provisions 174 00:10:52,160 --> 00:10:56,800 Speaker 1: under which the SEC could only remove its commissioners for 175 00:10:56,960 --> 00:11:01,440 Speaker 1: cause were unconstitutional. The SEC had to have authority to 176 00:11:01,520 --> 00:11:05,000 Speaker 1: remove at any time the commissioners of the pc a 177 00:11:05,080 --> 00:11:08,160 Speaker 1: o B on the same kind of argument. So here 178 00:11:08,200 --> 00:11:13,319 Speaker 1: it's in a different setting, different agency, but some responsibility 179 00:11:13,320 --> 00:11:17,160 Speaker 1: and accountability to the leading executive officers. May be a 180 00:11:17,240 --> 00:11:20,319 Speaker 1: requirement that the Court is reading into the structure of 181 00:11:20,320 --> 00:11:24,160 Speaker 1: administrative agencies. Dangerous to predict what the Court's going to do, 182 00:11:24,559 --> 00:11:26,920 Speaker 1: but I think they're going to take the narrower approach, 183 00:11:27,200 --> 00:11:32,040 Speaker 1: and it most strike down this one provision about limited removal, 184 00:11:32,240 --> 00:11:36,640 Speaker 1: but removal only for cause but not otherwise invalidate the agency, 185 00:11:36,920 --> 00:11:39,000 Speaker 1: even though there are some justices that would like to 186 00:11:39,040 --> 00:11:42,000 Speaker 1: do that. Yeah, Justice gorse It has made it clear 187 00:11:42,040 --> 00:11:45,920 Speaker 1: he wants to undo several features of the modern administrative state. 188 00:11:46,400 --> 00:11:51,360 Speaker 1: Why are the conservatives so concerned about administrative agencies? This 189 00:11:51,440 --> 00:11:54,080 Speaker 1: has been the theme of the Federal Society and other 190 00:11:54,120 --> 00:11:58,160 Speaker 1: conservatives for probably five or six years now. They don't 191 00:11:58,200 --> 00:12:03,559 Speaker 1: trust the administrative state. They think the administrative state defies politics, 192 00:12:03,679 --> 00:12:07,360 Speaker 1: is not politically responsive or politically accountable, and they want 193 00:12:07,360 --> 00:12:11,240 Speaker 1: to subject it to both greater presidential or executive authority, 194 00:12:11,559 --> 00:12:14,800 Speaker 1: and probably have doubts about whether or not an agency 195 00:12:14,840 --> 00:12:18,559 Speaker 1: should be funded other than by Congress. Would you consider 196 00:12:18,920 --> 00:12:22,840 Speaker 1: these two decisions the highlights of the term as far 197 00:12:22,920 --> 00:12:26,200 Speaker 1: as business is concerned, Well, I mean, it depends what 198 00:12:26,320 --> 00:12:29,480 Speaker 1: the outcome is. If they take the narrower approach, their 199 00:12:29,600 --> 00:12:33,440 Speaker 1: significant decisions, but they aren't something that's going to really 200 00:12:33,559 --> 00:12:38,079 Speaker 1: realign the political and administrative structure of our government. If 201 00:12:38,120 --> 00:12:43,079 Speaker 1: they were to strike down the CFPB broadly, then that 202 00:12:43,160 --> 00:12:46,040 Speaker 1: would be a blow that would signal that much of 203 00:12:46,040 --> 00:12:49,280 Speaker 1: administrative law has to be reconsidered and the powers of 204 00:12:49,280 --> 00:12:53,600 Speaker 1: administrative agencies would be subject to repeat attack. SEC at 205 00:12:53,640 --> 00:12:55,640 Speaker 1: least already suffered the LASS a couple of years ago 206 00:12:56,000 --> 00:12:58,760 Speaker 1: when they decided that the ability to get discoorgement was 207 00:12:58,840 --> 00:13:02,559 Speaker 1: subject to a very short statute of limitations. Congress may 208 00:13:02,640 --> 00:13:06,160 Speaker 1: change that, but there's already been one battle lost, so 209 00:13:06,320 --> 00:13:09,360 Speaker 1: the SEC has several of these battles they're fighting, and 210 00:13:09,440 --> 00:13:14,600 Speaker 1: the cftb UH is facing potentially a life or death threat. 211 00:13:14,720 --> 00:13:16,959 Speaker 1: But I think it's going to wind up being only 212 00:13:17,400 --> 00:13:21,040 Speaker 1: a striking down of the ability of the director to 213 00:13:21,080 --> 00:13:23,720 Speaker 1: stay in office even when the President wants to dismiss her. 214 00:13:23,960 --> 00:13:26,800 Speaker 1: Thanks for being on Bloomberg Law Jack. That's Professor John 215 00:13:26,880 --> 00:13:30,040 Speaker 1: Coffee of Columbia Law School. I'm June Grasso, and this 216 00:13:30,200 --> 00:13:30,839 Speaker 1: is Bloomberg