United States: SEC Encourages The Supreme Court To Hear Case To Determine If Disgorgement Is Subject To Five-Year Statute Of Limitations

In a development with potentially far-reaching consequences for SEC enforcement actions, the SEC, as Respondent, and notwithstanding that it prevailed below, is urging the Supreme Court to grant certiorari and to take up the question of whether the five-year statute of limitations set forth in 28 U.S.C. § 2462 "for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise" applies to SEC claims for disgorgement.1

The case presenting the issue, Kokesh v. SEC, comes from the Tenth Circuit and is fully briefed and awaiting conference before the Supreme Court. In Kokesh, the Tenth Circuit concluded that disgorgement is not subject to § 2462's statute of limitations. This decision is consistent with decisions of the District of Columbia and First Circuits, but at odds with a recent Eleventh Circuit decision on the same issue. Despite receiving a favorable ruling in the Tenth Circuit, the SEC has agreed with Petitioner Kokesh that the Supreme Court should hear the case. The government's decision to join the Petitioner in urging review makes Kokesh a strong candidate for the grant of certiorari.

The circuit split presented by Kokesh follows from the Supreme Court's 2013 ruling in Gabelli v. SEC.2 In Gabelli, the Supreme Court held that SEC claims for monetary penalties are subject to § 2462's five-year statute of limitations. The Court, however, did not rule on whether the statute of limitations applies to disgorgement.

Thereafter, the Eleventh Circuit, in SEC v. Graham, held that disgorgement is subject to § 2462's five-year statute of limitations. The court found that "forfeiture and disgorgement are effectively synonyms," such that "§ 2462's statute of limitations applies to disgorgement."3 In the court's view, "disgorgement is imposed as redress for wrongdoing," and therefore is a subset of a forfeiture penalty that is subject to the statute of limitations.

In Kokesh v. SEC, the Tenth Circuit came to an opposite conclusion. In that case, Kokesh was found liable for improperly directing – between 1995 and 2006 – two investment adviser firms that he controlled to receive payments and distributions from funds the advisers managed. The district court ordered $34.9 million disgorged for securities violations dating as far back as 1995, plus $18 million in prejudgment interest. Nearly $30 million of the court's disgorgement order reflected conduct occurring more than five years before the SEC filed suit in 2009. On appeal, Kokesh maintained that under SEC v. Graham, the court's disgorgement order constituted a penalty or forfeiture, and therefore violated, in substantial part, § 2462's five-year statute of limitations.

The Tenth Circuit affirmed, holding that disgorgement is neither a penalty nor a forfeiture subject to § 2462's five-year statute of limitations. The court reasoned that disgorgement is not a punitive "penalty" and is not a "forfeiture" as it historically is understood.

In his petition, Kokesh in turn maintains that disgorgement is a punitive remedy designed to deter violations of the securities laws: "[d]isgorgement judgments are monetary judgments, payable to the government, imposed as a result of a judicial finding of wrongdoing." Kokesh contends that without a Supreme Court ruling that disgorgement is subject to § 2462's five-year statute of limitations, liability will be "limitless in time" and place "[e]very participant in the securities industry ... eternally at risk of being confronted with stale claims."4

The U.S. Chamber of Commerce has filed an amicus brief in support of Kokesh's petition. The Chamber argues that open-ended liability periods "hamper business and investment activity," and that "long-belated enforcement actions are less likely to protect or help market participants."5 In addition, the Chamber notes that while the SEC contends that disgorgement is not a "fine, penalty or forfeiture" for purposes of SEC enforcement actions, the agency has successfully argued that disgorgement is a "fine, penalty or forfeiture" that may not be discharged in bankruptcy.

The Supreme Court has the opportunity to take up the case at its next conference, scheduled for Jan. 6, 2017.


1 Disgorgement refers to the process by which a court determines the amount of money acquired through wrongdoing, and generally orders the wrongdoer to pay to the court that amount, potentially plus interest.

2 133 S. Ct. 1216 (2013).

3 823 F.3d 1357, 1363 (11th Cir. 2016).  In contrast to its disgorgement holding, the Graham court held that injunctions sought by the SEC are "equitable, forward-looking remedies and not penalties within the meaning of § 2462." Id. at 1362.

4 Brief for Petitioner at 18, 25, Kokesh v. SEC  (No. 16-529).

5 Brief for the Chamber of Commerce of the United States of America as Amicus Curiae Supporting Petitioner at 1, Kokesh v. SEC  (No. 16-529).

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