The Supreme Court Limits SEC Disgorgement: What it Means for Defendants
On Monday, June 5, the U.S. Supreme Court issued a decision imposing a five-year statute of limitations on any claim for disgorgement in a Securities and Exchange Commission (SEC) enforcement action. Given the Court’s imposition of a limitations period, defendants facing SEC enforcement action now have important protection from disgorgement of funds over an unlimited time period. The SEC must now bring any claim for disgorgement within five years of the date the claim accrued.
Justice Sonia Sotomayor, writing for a unanimous court, stated that the five-year statute of limitations established by 28 U.S.C. § 2462 is applicable to SEC disgorgement orders because disgorgement operates as a penalty under that section. Prior to this decision, there was a circuit court split over whether § 2462’s five-year limitations period on enforcement of any “civil fine, penalty, or forfeiture” applied to disgorgement orders in addition to monetary civil penalties.
In Kokesh v. SEC
, the trial court imposed monetary civil penalties and disgorgement. The court applied § 2462’s five-year statute of limitations to only the civil penalties, resulting in a $34.9 million disgorgement order for Kokesh’s ill-gotten gains over a 14-year period. By imposing a five-year statute of limitations on disgorgement orders, the Supreme Court effectively lowered Kokesh’s judgment by $29.9 million.
On Monday, June 5, the U.S. Supreme Court issued a decision imposing a five-year statute of limitations on any claim for disgorgement in a Securities and Exchange Commission (SEC) enforcement action. A unanimous court, including recently added Justice Neil Gorsuch, decided to overturn a Tenth Circuit decision that drew a distinction between disgorgement and other monetary civil penalties for the purposes of 28 U.S.C. § 2462. Justice Sonia Sotomayor, writing for the court, stated that the five-year statute of limitations established by § 2462 was applicable to SEC disgorgement orders because disgorgement operates as a penalty under that section.
Given the Court’s imposition of a limitations period, defendants facing SEC enforcement action now have important protection from SEC disgorgement claims. The SEC must now bring any claim for disgorgement within five years of the date the claim accrued.
Prior to the 1970’s, the Commission’s authority in enforcement proceedings was limited to injunctions barring future action. Courts began ordering disgorgement along with injunctions in the 1970’s to deprive wrongdoers of their ill-gotten gains. In 1990, Congress passed legislation allowing the Commission to seek civil monetary damages. In 2013, the Supreme Court held that 28 USC § 2462, which imposes a five-year statute of limitations on any enforcement action of any “civil fine, penalty, or forfeiture,” applies when the Commission seeks monetary civil penalties.
In recent years, circuit courts split on whether the statute of limitations in § 2462 also applied to disgorgement orders imposed as a sanction for violating federal securities law. The First, Tenth, and D.C. Circuits were of the opinion that the statute did not apply because disgorgements were not a penalty. The Eleventh Circuit found that the statute applied because disgorgement was essentially the same as forfeiture. In January 2017, the Supreme Court granted review in Kokesh v. SEC
to resolve this circuit split.
History of Kokesh v. SEC
In 2009, the Commission instituted an enforcement action against Charles Kokesh, alleging that he violated various securities laws and received ill-gotten gains totaling $34.9 million from 1995 to 2009. The Commission sought monetary civil penalties and disgorgement along with an injunction barring Kokesh from any future violations of securities laws. After a jury found that Kokesh had violated securities laws, the District Court applied § 2462’s five-year statute of limitations to the monetary civil penalties, but determined that no such limitations period applied to the $34.9 million disgorgement judgment ($29.9 million of which accrued outside the limitations period imposed on the civil penalties). The Tenth Circuit affirmed, holding that the statute of limitations did not apply because a disgorgement order was neither a “penalty” nor a “forfeiture” within the meaning of § 2462.
Supreme Court’s Reasoning in Kokesh Decision
The Supreme Court held that disgorgement in the context of SEC enforcement actions constituted a penalty under § 2462 and was subject to a five-year statute of limitations beginning on the date the claim accrued. The Court noted that disgorgement often functions as a penalty because it is imposed by the courts as a consequence for violating public laws with the primary purpose of deterring future violations. “Sanctions imposed for the purpose of deterring infractions of public laws are inherently punitive,” wrote Justice Sotomayor. Further, in many cases SEC disgorgement is not compensatory, as some funds are paid to the victims and other funds are dispersed to the Treasury. A payment made to the government as a consequence of violating a law is non-compensatory and operates as a penalty.
The Government’s primary argument against categorizing disgorgement as a penalty was that SEC disgorgement is merely remedial and returns the defendant to the position he would have operated prior to the violation. However, the Court noted that sometimes a defendant is disgorged of more than just his ill-gotten gains, which leaves the defendant worse off. Thus, the Court concluded that disgorgement in this context is punitive rather than remedial even if it also served some compensatory purpose.
*This article was additionally authored by Savanna Barlow.
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