- US Supreme Court Intimates That the SEC¿s Use of Disgorgement May Be Subject to Five-Year Statute of Limitations
- April 20, 2017 | Authors: Peter J. Anderson; Bruce M. Bettigole; Olga Greenberg; Neil S. Lang; Brian L. Rubin
- Law Firms: Eversheds Sutherland (US) LLP - Atlanta Office; Eversheds Sutherland (US) LLP - Washington Office; Eversheds Sutherland (US) LLP - Atlanta Office; Eversheds Sutherland (US) LLP - Washington Office
On April 18, 2017, the US Supreme Court heard oral arguments in Kokesh v. Securities and Exchange Commission regarding whether disgorgement ordered by the US Securities and Exchange Commission (SEC) is subject to the five-year statute of limitations on civil fines, penalties, and forfeitures.
Federal law applies a five-year statute of limitations to fines, penalties, forfeitures, and other punitive remedies in civil enforcement matters. See 28 U.S.C. § 2462. In its 2013 decision, Gabelli v. SEC, the Supreme Court unanimously upheld this time bar for monetary penalties in SEC enforcement actions but reserved the question of whether Section 2462 applies to claims for disgorgement. In the aftermath of Gabelli, the SEC argued that the five-year statute of limitations did not apply to disgorgement because disgorgement is an equitable remedy not a penalty. The US Courts of Appeals for the DC Circuit and First Circuit had agreed, finding that the statute did not apply to disgorgement.1 The Eleventh Circuit, however, disagreed, finding that disgorgement is effectively the same as forfeiture and thus subject to the five-year statute of limitations.2
In the case at bar, investment adviser Charles Kokesh is appealing a judgment from the District of New Mexico where a jury found him liable for misappropriating investor money from four business development companies from 1995 through July 2007 and ordered him to disgorge nearly $35 million, in addition to more than $18 million in prejudgment interest, as well as a $2.4 million penalty. Although the penalty only applied to Kokesh’s conduct within the five-year period prior to the SEC’s lawsuit (as required by Section 2462), the disgorgement consisted of proceeds misappropriated throughout the entirety of his scheme, with the bulk coming outside the five-year period. In his appeal, the Tenth Circuit sided with the DC and First Circuits, finding Section 2462 inapplicable because the disgorgement was not a penalty. The Supreme Court granted certiorari in January 2017 to resolve the circuit split.
At the hearing, Kokesh’s attorney argued that the disgorgement constituted a punitive remedy that falls squarely within the language of Section 2462 and is thus time-barred. In essence, disgorgement is a forfeiture—it requires defendants to turn money over to the SEC which decides whether to reimburse affected individuals or to send it to the federal government’s coffers.
The SEC argued that disgorgement is equitable relief that is not considered punitive but rather places the defendant in the position he or she was in prior to the alleged misconduct. The remedy is designed to prevent those who have acted wrongfully from maintaining their ill-gotten gains or, in effect, profiting from their wrongdoing.
Although questions and comments from the justices during oral argument do not always accurately reflect the Court’s final decision, the justices appeared to indicate they believe the SEC is subject to the five-year statute of limitations when seeking disgorgement. As an initial matter, the justices recognized that no statute expressly authorizes the SEC to impose disgorgement. Rather, the SEC appears to rely on the inherent power of the courts. The justices also struggled with the fact that the SEC failed to offer any guidance on the application of disgorgement in its enforcement actions. The justices also appeared concerned about the indefinite application of the remedy. Indeed, Chief Justice John Roberts, citing Chief Justice John Marshall, noted that allowing a penalty remedy without limit is “utterly repugnant to the genius of our laws.”
If the Court determines that the SEC’s ability to pursue an action for disgorgement over five years after the alleged misconduct is impermissible, such a ruling would have serious implications for the SEC, which ordered $2.8 billion in disgorgement during fiscal year 2016, more than double what it ordered in penalties ($1.3 billion). Since Gabelli, the SEC generally has accelerated enforcement actions where penalties are sought to ensure that they are filed within the five-year statute of limitations. If the Court rules against the SEC in Kokesh, the SEC will need the same urgency to obtain disgorgement.
A decision is expected by the end of June.
1 SEC v. Tambone, 550 F.3d 106 (1st Cir. 2008); Riordan v. SEC, 627 F.3d 1230 (D.C. Cir. 2010).
2 SEC v. Graham, 823 F.3d 1357 (11th Cir. 2016).