A Miami federal judge ruled the Securities and Exchange Commission can seek recovery of nearly $186 million from the heirs of a deceased fraudster.
U.S. District Judge Cecilia Altonaga ruled Thursday the SEC's claims for disgorgement of ill-gotten gains can go forward against David Brooks' estate, dismissing defense counsel's argument that a June U.S. Supreme Court decision meant the claims should perish with him. The Supreme Court's ruling only applies to disgorgement for the purposes of determining the statute of limitations, not in other contexts, Altonaga ruled.
Brooks, the former CEO and chairman of body armor supplier DHB Industries, died in October while in prison after he was convicted. The SEC's original 2007 complaint alleged he "engaged in a pervasive accounting fraud, systematically looted company coffers and took advantage of DHB's artificially inflated stock price to dump millions of his shares on the market for proceeds of approximately $186 million."
Altonaga's order is one of the first to interpret the implications of the unanimous Supreme Court decision in Kokesh v. SEC, which held SEC disgorgement claims are bound by a five-year statute of limitations. The holding was based on the finding that disgorgement is a "penalty" within the context of the statute of limitations. A penalty is meant to punish a defendant, as opposed to "remedial" claims meant to help the fraud's victims.
In Brooks' case, defense counsel for his estate argued the Kokesh ruling meant the SEC claims can't passed on to Brooks' estate after his death.
"The survivability of the SEC's claims against David Brooks ... is based on a determination of whether they are penal or remedial sanctions," wrote defense attorneys Michael Pineiro and Jeffrey Marcus of Marcus Neiman & Rashbaum in Miami. "Penal sanctions abate on the death of a party, while remedial actions can be asserted against an estate. ... The Kokesh decision is definitive, controlling law that SEC disgorgement is a penalty."
But Altonaga ruled the defense read the decision too broadly. Disgorgement can be compensatory, she ruled, and the SEC intends to give all proceeds from the disgorgement in Brooks' case to investors.
"Kokesh's holding cannot be plucked from the statutory context that gives it force," Altonaga wrote. "Kokesh is about statutes of limitations, and its holding is embedded in this context. Its first paragraph could not make this sentiment plainer: "[d]isgorgement in the securities-enforcement context is a 'penalty' within the meaning of [section] 2462, and so disgorgement actions must be commenced within five years of the date the claim accrues."