Securities Snapshot
January 12, 2021

SEC’s Disgorgement Authority Expanded Under National Defense Authorization Act for Fiscal Year 2021

SEC’s Disgorgement Authority Expanded Under National Defense Authorization Act for Fiscal Year 2021; Delaware Court of Chancery Rejects Derivative Claim Based On Deficient Anti-Money Laundering Compliance Efforts: “Bad Oversight Is Not Bad-Faith Oversight”; Tennessee Federal Court Rejects Attempts By Carlos Ghosn and Other Nissan Execs To Dismiss Putative Securities Fraud Class Action.

Effective January 1, 2021, Congress significantly enhanced the SEC’s enforcement authority, both by explicitly authorizing the agency to seek disgorgement for “unjust enrichment” and by doubling, from five to ten years, the time the SEC will have in which to bring actions for scienter-based violations.

The changes are part of the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”) — which Congress enacted over Presidential veto on New Year’s Day. Specifically, section 6501 of the NDAA, entitled “Investigations and Prosecution of Offenses for Violations of the Securities Laws,” amends the Securities and Exchange Act of 1934 (“1934 Act”) to expand the SEC’s authority to seek disgorgement. Disgorgement is generally “a form of ‘restitution measured by the defendant’s wrongful gain’” that is paid to and distributed by the district court. See, e.g., Kokesh, 137 S.Ct. at 1640, 1644. The NDAA strengthens the SEC’s ability to seek disgorgement in civil enforcement actions in two notable ways. 

First, the NDAA amends the 1934 Act to explicitly authorize the SEC to seek “disgorgement ... of any unjust enrichment by the person who received such unjust enrichment as a result of” violating securities laws. See 
William M. (Mac) Thornberry Defense Authorization Act for Fiscal Year 2021, H.R. 6395, 116th Cong. (2020) (“NDAA”) § 6501 (a)(1)(B)(ii) (to be codified as 15 U.S.C. § 78u(d)(3)(A)(ii), (d)(7)). Previously, the 1934 Act did not expressly authorize the SEC to seek disgorgement in federal court. Instead, the remedy was considered part of the “equitable relief” generally available to the SEC “for the benefit of investors.” See 15 U.S.C. § 78u(d)(5); Liu v. SEC, 140 S.Ct. 1936, 1940 (2020). As such, disgorgement awards had been limited by the U.S. Supreme Court, in Liu, to “award[s] that do[] not exceed a wrongdoer’s net profits,” in accordance with traditional principles of equity. See Liu, 140 S.Ct. at 1941, 1943-47. It is uncertain what, if any, effect the NDAA’s amendment will have on the limits established in the Liu decision. The amendment may also help resolve other questions left open in Liu, such as whether disgorged funds must be distributed directly to investors in all cases, and whether a wrongdoer may be liable for the benefits that accrued to his affiliates, through joint-and-several liability or otherwise. See Liu, 140 S.Ct. at 1948-50.

Second, the NDAA amends the 1934 Act to expand the time during which the SEC may seek disgorgement. Specifically, for any securities law violation “for which scienter must be established,” the SEC may seek disgorgement within “10 years after the latest date of the violation that gives rise to the action.” See NDAA § 6501 (a)(8)(A)(ii) (to be codified as 15 U.S.C. § 78u(d)(8)(A)(ii)). This includes violations of (i) 
Section 10(b) of the 1934 Act (15 U.S.C. § 78j(b)), (ii) Section 17(a)(1) of the Securities Act of 1933 (15 U.S.C. § 77q(a)(1)), and (iii) Section 206(1) of the Investment Advisers Act of 1940 (15 U.S.C. § 80b-6(1)). Id. For any other violation, the SEC has five years to seek disgorgement. See NDAA § 6501 (a)(8)(A)(i) (to be codified as 15 U.S.C. § 78u(d)(8)(A)(i)).Previously, a five-year limitations period controlled all such claims. See Kokesh,137 S.Ct. at 1644-45see also 28 U.S.C. § 2462. This extension will likely be significant in many cases. For example, according to former SEC Chairman Jay Clayton, “more than $1 billion in ill-gotten gains has been unavailable” for disgorgement since 2017 due to the five-year statute of limitations established in KokeshSee Jay Clayton, Testimony on “Oversight of the Securities and Exchange Commission,” SEC.GOV (Nov. 17, 2020). In addition, the NDAA implements a ten-year statute of limitations for “any equitable remedy, including for an injunction or for a bar, suspension, or cease and desist order,” and suspends all limitations periods during any period in which the alleged violator is outside of the United States. See NDAA § 6501(a)(8)(B)-(C) (to be codified as 15 U.S.C. § 78u(d)(8)(B)-(C)). These amendments to the 1934 Act apply to any action that is “pending on, or commenced on or after” January 1, 2021, i.e., the date the NDAA was enacted. Id. at § 6501(b).


On January 4, 2021, in 
Richardson v. MoneyGram International, Inc. et al.the Delaware Court of Chancery dismissed a shareholder derivative suit alleging that a money-transfer services company and its Board failed to implement sufficient anti-money laundering (“AML”) and fraud controls, which led to costly investigations, criminal charges, and $125 million in fines. The court determined that, although the Board may have been “feckless [in its] oversight” of the Company’s AML compliance efforts, such misfeasance can only rise to a breach of the duty of loyalty when conducted in bad faith, and “bad oversight is not bad-faith oversight” (emphasis added). 

In 2012, MoneyGram — a publicly traded, global financial services business that enables the transfer of money throughout the world — was criminally charged in the U.S. District Court for the Middle District of Pennsylvania for aiding and abetting wire fraud (18 U.S.C. § 1343) and failing to maintain effective AML procedures (31 U.S.C. § 5318(h)). MoneyGram entered into a five-year deferred prosecution agreement (“DPA”). The DPA required the company to forfeit $100 million and implement certain policies and procedures to ensure compliance.

Over the next five years, MoneyGram made efforts to comply with its obligations under the DPA. Fraud complaints increased in 2015, however, and, in 2017, an independent auditor informed the Board that many problems remained with the company’s AML and anti-fraud program. Due to these continued compliance issues, and following discussions with the government, the DPA was amended and extended to 2021, subjecting MoneyGram to enhanced compliance obligations and an additional $125 million in forfeiture. 

On December 18, 2019, a MoneyGram stockholder filed a derivative action against the company, its directors, and two officers, alleging that the individual defendants had breached their fiduciary duties of loyalty by consciously failing to address MoneyGram’s DPA-compliance deficiencies and failing to ensure that certain compliance shortcomings were fully disclosed to regulators. Defendants moved to dismiss under Rule 23.1 for failure to make a pre-litigation demand on the Board. In response, plaintiff asserted that demand would be futile, arguing that the Board and certain officers were interested in the litigation’s outcome because their “failure ... to exercise oversight sufficient to comply with their fiduciary duties” of loyalty created a “substantial likelihood of directorial liability.” Specifically, plaintiff claimed that the Board was made aware of certain deficiencies in MoneyGram’s AML and anti-fraud policies, “took absolutely no action to correct” them, and “affirmatively misrepresented the effectiveness” of the company’s compliance to the government.

The court rejected plaintiff’s arguments, concluding that the Board’s alleged misfeasance in overseeing the DPA compliance effort “did not reasonably imply bad faith,” absent allegations supporting an inference that the Board “disregarded a known duty to act or knowingly caused MoneyGram to violate a positive law.” As the court noted, the complaint did “not allege that the directors did nothing” to address the several compliance issues alleged, but rather alleged “that what they did was insufficient.” The court held that “a failed attempt is not itself indicative of a bad-faith attempt,” and “[t]he mere implementation of an unsuccessful program cannot support liability for lack of oversight.” The court contrasted plaintiff’s allegations with cases in which a defendant completely “ignore[d] a clear duty to act,” implemented a “sham remediation,” or took “an insincere action to fool regulators,” all of which could permit an inference of bad faith and directorial liability. Similarly, the court found that, although an “affirmative act[] to mislead regulators or prosecutors ... would implicate bad faith,” the complaint lacked any particularized allegations that the defendants did so. The DOJ’s finding that MoneyGram had “inadequately disclos[ed]” a certain weakness in its fraud interdiction system leading up to the DPA’s amendment, “without more,” did not amount to particularized allegations of bad faith. Accordingly, the court concluded that MoneyGram’s directors did not face a substantial likelihood of liability and thus that demand was not excused under Rule 23.1, and dismissed the case.


On January 4, 2021, in Jackson County Employees’ Retirement System, et al. v. Carlos Ghosn, et al., a federal district court in Tennessee dismissed putative securities fraud claims against one current Nissan executive, on personal jurisdiction grounds, but denied similar requests by Nissan and its fugitive ex-CEO and Chairman, Carlos Ghosn. The court further denied defendants’ motions to dismiss for failure to state a claim, holding that defendants’ statements about Nissan’s ethics, legal compliance, and corporate structure were actionable and pleaded with scienter, in light of Ghosn’s intentionally misreported compensation and the Board’s complete lack of oversight.

The complaint alleges that, from 2010 to 2018, Carlos Ghosn engaged in an unlawful scheme to award himself more than $80 million in deferred and undisclosed compensation that Nissan would pay out upon his retirement. It further alleges that, in failing to disclose his full compensation, Ghosn, Nissan, and four of Nissan’s directors and officers violated U.S. and Japanese securities laws by making dozens of false and misleading statements in Nissan’s annual financial reports and other public disclosures throughout a four-year class period. On August 5, 2019, Ghosn and two Japanese defendants moved to dismiss for lack of personal jurisdiction. Additionally, all defendants moved to dismiss the U.S. securities fraud claims for failure to state a claim, contending, among other things, that (i) alleged misstatements regarding Nissan’s ethics, legal compliance, and corporate governance structure were not demonstrably false and were immaterial puffery, and (ii) the complaint failed to adequately plead scienter as to two individual defendants — a former Nissan director and the company’s former CFO — who both claimed to have been “deceived” by Ghosn and his accomplice, Greg Kelly.

The court denied two out of the three motions to dismiss for lack of personal jurisdiction, and denied all motions to dismiss for failure to state a claim. With respect to personal jurisdiction, the court held that all three defendants had purposefully availed themselves of U.S. jurisdiction by knowingly making materially false statements they knew would appear in English on Nissan’s U.S. investor website, and that plaintiffs’ claims “arise from” those statements, i.e., defendants’ contact with the U.S. However, the court held that haling Nissan’s current and short-tenured CFO, Hiroshi Karube, into the U.S. would be constitutionally “unreasonable” under the circumstances. The court determined that the interests of the U.S. and plaintiffs in prosecuting the case against Karube were “relatively light,” as his “marginal addition” would “add little or nothing to [any] potential recovery,” and his tenure at Nissan during the class period was limited (several months). In light of these minimal interests, the court held that the burden Karube would face by having to defend himself in the U.S. rendered personal jurisdiction unreasonable, and dismissed all claims against him. Although the court found that Ghosn and the other Japanese defendant, Hiroto Saikawa, would also be burdened by litigating the case in a foreign jurisdiction, the court concluded that the interests of the U.S. in enforcing its securities laws and of plaintiffs in obtaining relief made exercise of jurisdiction over these individuals reasonable, given their respective roles and tenure with Nissan.

The court also rejected defendants’ challenges to the federal securities fraud claims under Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange Act of 1934. The court began by rejecting defendants’ claims that certain alleged misstatements were not false, including that “Nissan practice[d] compliance with high ethical standards,” that it aimed “to conduct fair, impartial and efficient business activities” by “adhering to the applicable laws and corporate rules,” and that the company “use[d] a corporate structure with supervision by the Board.” The court determined that falsity could be inferred from allegations that an internal review conducted by Nissan had found facts demonstrating unethical conduct by Ghosn and his accomplice, such as falsifying documents and private use of company funds, and that these “facts [were] sufficient to suspect violations of laws and regulations.” The court further determined, “at least as to Ghosn’s compensation, [that] there was no ‘supervision by the Board of Directors’ at all.” Thus, Nissan’s claim that it “used a corporate structure with supervision by the Board” was false insofar as the Board’s “actual involvement” (with average board meeting lengths of less than 20 minutes) “fell far short of the supervisory oversight role represented to investors.” Finally, the court rejected arguments by one former Nissan director and Nissan’s former CFO that neither acted with scienter because they were “deceived by Ghosn and Kelly” and affirmatively prevented from discovering Ghosn’s scheme. The court concluded that given their supervisory duties — e.g., to review director compensation and associated controls — their “claimed ignorance supports [plaintiffs’] allegation of recklessness,” which was sufficient to state a claim.

John A. Barker