• The Supreme Court Agrees to Determine Whether SEC Actions Seeking Disgorgement are Subject to the Five-Year Limitations Period Set Forth in 28 U.S.C. § 2462
  • February 1, 2017 | Authors: Donald S. Davidson; Robert A. Horowitz; Jason S. Lewis
  • Law Firms: Greenberg Traurig, LLP - San Francisco Office; Greenberg Traurig, LLP - New York Office; Greenberg Traurig, LLP - Dallas Office
  • At the urging of both an individual petitioner and the SEC, the Supreme Court has agreed to resolve a recent circuit split as to whether the five-year limitations period applicable to SEC enforcement actions applies to the remedy of disgorgement. Kokesh v. SEC, --- S. Ct. ---, No. 16-529, 2017 WL 125673 (U.S. Jan. 13, 2017). The issue is whether disgorgement is a “penalty” or “forfeiture” for purposes of the five-year limitations period in 28 U.S.C. § 2462, which applies to government actions seeking a “civil fine, penalty, or forfeiture.” If, on the other hand, disgorgement is an equitable remedy akin to injunctive relief, then a long line of cases holds that the statute would not apply. Last year saw two U.S. Courts of Appeal reach diametrically opposed conclusions on this question. In May, the Eleventh Circuit held that disgorgement is a “forfeiture” subject to the five-year limitations period. See SEC v. Graham, 823 F.3d 1357, 1363-64 (11th Cir. 2016). Three months later, the Tenth Circuit held that disgorgement is neither a “penalty” nor a “forfeiture” and therefore is not subject to the five-year limitations period. See SEC v. Kokesh, 834 F.3d 1158, 1166-67 (10th Cir. 2016).

    SEC v. Graham

    In Graham, the Eleventh Circuit considered whether SEC actions seeking declaratory relief, injunctive relief, and disgorgement of profits from illegal ventures are subject to the five-year limitations period of Section 2462. In determining whether an injunction or a declaratory judgment would be subject to the five-year limitations period, the court considered whether they would constitute a “penalty” within the meaning of the statute and concluded that a “penalty” is a punishment imposed for past wrongdoing. See Graham, 823 F.3d at 1361. Based on that definition, the Court held that injunctions are not penalties because they prevent future harms and, therefore, Section 2462’s five-year limitations period is inapplicable to claims for injunctive relief. See id. at 1362.

    Turning to the question of whether actions seeking declaratory relief are subject to a five-year limitations period, the Graham court held that a declaration that defendants violated the securities laws is a “penalty” because it is “backward-looking and operates as a penalty.” Id. at 1362-63. “A declaration of liability goes beyond compensation and is intended to punish because it serves neither a remedial nor a preventative purpose; it is designed to redress previous infractions rather than to stop any ongoing or future harm.” Id. at 1362 (citation omitted). Therefore, the court held that the SEC’s request for declaratory relief was subject to Section 2462’s five-year statute of limitations.

    The court did not reach the issue of whether disgorgement is a “penalty,” see id. at 1363 n.3, but had no difficulty finding that it constitutes a “forfeiture” for purposes of Section 2462. The appellate court agreed with the district court that “‘the disgorgement of all ill-gotten gains realized from the alleged violations of the securities laws-i.e., requiring defendants to relinquish money and property-can truly be regarded as nothing other than a forfeiture (both pecuniary and otherwise)[.]’” Id. at 1363. Finding “no meaningful difference in the definitions of disgorgement and forfeiture[,]” the court applied Section 2462’s five-year limitation to forfeiture actions and barred the SEC’s claim for disgorgement. Id. at 1363-64.

    SEC v. Kokesh

    In Kokesh, the Tenth Circuit agreed with Graham that SEC claims for injunctive relief are not subject to the five-year limitations period because they are remedial and do not constitute a penalty or forfeiture, but parted company with the Eleventh Circuit as to whether disgorgement constitutes a “forfeiture.” The Tenth Circuit agreed with the D.C. Circuit in Riordan v. S.E.C., 627 F.3d 1230, 1234 (D.C. Cir. 2010) and the First Circuit in S.E.C. v. Tambone, 550 F.3d 106, 148 (1st Cir. 2008), that disgorgement is not a “penalty” because it is remedial: “Properly applied, the disgorgement remedy does not inflict punishment. ‘The object of restitution [in the disgorgement context] . . . is to eliminate profit from wrongdoing while avoiding, so far as possible, the imposition of a penalty.’” 834 F.3d at 1164 (citing Restatement (Third) of Restitution and Unjust Enrichment § 51(4)).

    Disagreeing with Graham, the Tenth Circuit rejected the argument that disgorgement is a “forfeiture.” It acknowledged that “the words forfeit and disgorge (as well as relinquish) capture similar concepts; one subject to formal forfeiture could be said to ‘disgorge’ what is forfeited.” Id. at 1165. However, the court explained that the word forfeiture in § 2462 must be read in the context of a government civil forfeiture action which, as defined in Black’s Law Dictionary, is “[a]n in rem proceeding brought by the government against property that either facilitated a crime or was acquired as a result of a criminal activity.” Id. at 1165-66. After a short review of the history of civil forfeiture actions, the court explained that in such actions “[t]he owner of the seized property could be completely innocent of any wrongdoing, and the value of the property taken have no necessary relation to any loss to others or gain to the owner.” Id. at 1166. While the court acknowledged that “in recent years federal forfeiture statutes have been expanded to include disgorgement-type remedies” such as the forfeiture of proceeds from criminal activities, it observed that “this is a recent development, occurring decades after § 2462 was enacted in 1948.” Id. The court concluded: “When the term forfeiture is linked in § 2462 to the undoubtedly punitive actions for a civil fine or penalty, it seems apparent that Congress was contemplating the meaning of forfeiture in this historical sense. The nonpunitive remedy of disgorgement does not fit in that company.” Id.

    CONCLUSION

    The Kokesh, Riordan, and Tambone line of cases seems overly formalistic and dependent on the fading and somewhat archaic distinctions between “legal” remedies and “equitable” ones. More importantly, those cases do not adequately account for the lack of any meaningful economic distinction between a “penalty” (or “forfeiture”) of some amount of money and a disgorgement of the same sum. In either case the government is seizing property, and the finality goals of the statute of limitations are frustrated if the SEC can swoop in many years after the events at issue - and after evidence has been lost, witnesses have died or disappeared, and memories have faded - and extract a pound of flesh that it then labels “disgorgement.”

    While not directly on point, the Supreme Court’s unanimous decision in Gabelli v. SEC, 133 S. Ct. 1216 (2013) may affect the Court’s disposition of Kokesh. In Gabelli, the Court held that Section 2462 is not tolled by the “discovery rule” applicable to private securities actions and that the five-year clock for the SEC to seek monetary penalties begins to tick when the alleged fraud occurs, not when the SEC discovers it. The Gabelli Court did not reach the question of whether the SEC’s requests for injunctive relief and disgorgement were governed by Section 2462, as those issues were not before it. See id. at 1120 n.1. But the Court’s refusal to give the government the same leeway accorded private litigants suggests that it may be inclined to hold the government’s feet to the fire when it fails to act within the statutory period.