Alerts

Limiting SEC Disgorgement – Unanimous Supreme Court Draws a Bright Line Five-Year Rule

Alerts / June 12, 2017

The Supreme Court held unanimously last week in Kokesh v. Securities and Exchange Commission, No. 16—529 (2017), that the Securities and Exchange Commission’s (SEC’s) often used disgorgement remedy was a penalty subject to the five-year statute of limitations under 28 U.S.C. § 2462.

28 U.S.C. § 2462 imposes a five-year statute of limitations on any suit or proceeding for the enforcement of any “civil fine, penalty, or forfeiture.” The Supreme Court has previously held that the five-year statute of limitations applies to civil monetary penalties sought by the SEC.[1] Because disgorgement was a judicially created remedy and not defined in the federal securities laws, the circuit courts had differing views on whether disgorgement was a civil fine, penalty, forfeiture or something more closely related to restitution. While Congress eventually gave the SEC the power to impose civil penalties, the SEC continues to seek disgorgement in its enforcement actions beyond the five-year period, maintaining the position that disgorgement is a remedial measure intended to restore the status quo and therefore not a penalty subject to any limitations period.

In Kokesh, in 2009, the SEC brought an enforcement action against Charles Kokesh for alleged violations of various securities laws on the basis that he purportedly concealed the misappropriation of $34.9 million from four business development companies from 1995 to 2009. Kokesh was ordered by the district court to pay $34.9 million in disgorgement and $18 million in prejudgment interest after a jury found him guilty of violating the Investment Advisers Act of 1940 and the Investment Company Act of 1940. The disgorgement included gains reaching back 14 years earlier, to 1995. While the district court decided that the five-year statute of limitations under 28 U.S.C. § 2462 applied to civil monetary penalties sought by the SEC, the court agreed with the SEC that disgorgement was not a penalty and that no statute of limitations applied. The Court of Appeals for the Tenth Circuit affirmed, creating a split with the Eleventh Circuit, which previously held in a different SEC enforcement action that the disgorgement remedy was subject to the five-year statute of limitations under 28 U.S.C. § 2462.[2]

The Supreme Court reversed the Tenth Circuit and unanimously held that disgorgement was ultimately a penalty subject to the five-year statute of limitations under Section 2462. The court defined a penalty as a “punishment, whether corporal or pecuniary, imposed, and enforced by the State, for a crime or offense against its laws.”[3] Two factors determine whether a monetary sanction qualifies as a penalty: (i) whether the wrong sought to be addressed is a wrong against the public or an individual; and (ii) whether the purpose is to punish and deter others, as opposed to compensating victims for a loss.

The Court found that disgorgement addressed a wrong committed against the public because it is a result of the violation of a public law. The Court emphasized this point by stating that a securities enforcement action can proceed even if the victims do not support the action or if the victims are not parties. With regards to the second factor, the Court held that the primary purpose of disgorgement is to deter violations of securities laws by depriving violators of their ill-gotten gains, and that disgorgement is not compensatory because there is no statutory mandate to pay the disgorgement to victims.

Arguing that its disgorgement remedy was remedial rather than punitive, the SEC maintained that disgorgement was simply returning the wrongdoer to the place he would have been had he not broken the law. The Court rejected this argument, noting that in insider-trading cases, defendants can actually end up worse off by disgorging both their personal profits and the gains made by third parties.

Key Lessons From Kokesh

It is now settled law that disgorgement as well as civil monetary penalties are subject to the five-year statute of limitations under 28 U.S.C. § 2462. Now that the SEC has a fixed and clear five-year window to seek these remedies, corporations and individuals can expect both an increase in the speed of SEC investigations and greater uses of tolling agreements that specially carve out an extended period of time for the SEC to seek penalties.

With this in mind, counsel and their clients should assess existing cases to determine if the SEC acted in time to preserve their ability to seek a penalty. Parties in the investigative stage should also be aggressively proactive in building and presenting their defense as early as possible in the enforcement process to avoid a potential rush by the SEC to file an action.

If you have any questions about this alert, please contact John J. Carney at jcarney@bakerlaw.com or +1.212.589.4255 or any member of BakerHostetler’s White Collar Defense and Corporate Investigations team.

Authorship credit: John J. Carney and Lauren P. Berglin


[1] Gabelli v. SEC, 568 U.S. 442, 454 (2013).
[2] Kokesh v. SEC, 834 F. 3d 1158 (2016).
[3] Kokesh v. SEC, No. 16—529 at 5.

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