United States: US Supreme Court: Five-Year Statute Of Limitations Applies To SEC Disgorgement

The Court's opinion resolves a circuit split concerning the reach of disgorgement orders.

In a unanimous decision, the US Supreme Court has ruled in Kokesh v. SEC that the five-year statute of limitations in 28 U.S.C. § 2462 applies to claims for disgorgement in enforcement actions brought by the US Securities and Exchange Commission (SEC).

This decision has implications for investigations involving potential violations of the federal securities laws, including those involving allegations of Foreign Corrupt Practices Act (FCPA) violations, insider trading, offering fraud, market manipulation, and broker-dealer and investment adviser fraud.

Background

In 2009, the SEC filed a civil enforcement action against New Mexico investment adviser Charles Kokesh alleging that Kokesh misappropriated funds from four business development companies from 1995 through 2009 and concealed the misappropriation by making false and misleading SEC filings. Kokesh was found liable in a jury trial and ordered in April 2015 to disgorge nearly $35 million in ill-gotten gains, in addition to a $2.4 million civil penalty and $18 million in pre-judgment interest. Kokesh appealed to the US Court of Appeals for the Tenth Circuit, arguing that the disgorgement order was a "penalty" and therefore subject to 28 U.S.C. § 2462, which creates a five-year statute of limitations for the enforcement of "any civil fine, penalty, or forfeiture, pecuniary or otherwise."1

In August 2016, the Tenth Circuit affirmed the order, holding that disgorgement of ill-gotten gains was neither a penalty nor a forfeiture and therefore was not subject to the five-year statute of limitations.2 In doing so, the Tenth Circuit widened an existing circuit split between the DC Circuit and the First Circuit on the one hand, which both had held that disgorgement was not subject to § 2462,3 and the Eleventh Circuit on the other hand, which had recently held in SEC v. Graham4 that § 2462 did apply to disgorgement because it was synonymous with forfeiture.

The Supreme Court's Opinion

On June 5, the Supreme Court resolved the circuit split, holding that disgorgement is a penalty under 28 U.S.C. § 2462 because it seeks to redress a wrong against the United States instead of a private individual and because its primary purpose is as a deterrent and not compensatory.5 Writing for a unanimous court, Justice Sonia Sotomayor opened the opinion by noting that in SEC cases, federal courts historically ordered disgorgement in the absence of statutory civil penalties. In 1990, Congress authorized the SEC to seek statutory monetary penalties for securities law violations, and the Supreme Court held in 2013 that such penalties were limited by § 2462.6

With respect to disgorgement, the Supreme Court observed that its definition of a "penalty" turns on two principles: First, a sanction is more likely to be penal in nature where it seeks to redress a public wrong—rather than harm to an individual—because "[p]enal laws, strictly and properly, are those imposing punishment for an offense committed against the State."7 Second, a sanction operates as a penalty if its purpose is to punish and to deter rather than to compensate specific victims for identifiable losses.

Applying these principles, the Supreme Court held that SEC disgorgement constitutes a penalty under § 2462 for three reasons:

  1. Disgorgement is imposed for violations of "public laws" because the violation "is committed against the United States rather than an aggrieved individual."8 As Justice Sotomayor observed, the SEC conceded as much by stating in its brief that it seeks disgorgement "to remedy harm to the public at large, rather than standing in the shoes of particular injured parties."9
  2. The primary purpose of disgorgement is punitive.10
  3. SEC disgorgement, unlike an award of damages, does not necessarily serve to compensate private injury because federal courts have the discretion to apportion disgorgement proceeds as they wish between victims and the US Treasury and are under no obligation to distribute any disgorgement funds to victims.

In sum, the Supreme Court stated, "SEC disgorgement thus bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate."11

In so holding, the Supreme Court found the SEC's argument—that disgorgement is "remedial," not punitive—to be untenable, reasoning that "SEC disgorgement sometimes exceeds the profits gained as a result of the violation" such that a defendant may be left worse off than before. The Court pointed to insider trading as an example; defendants convicted of insider trading may be ordered to disgorge not only their own ill-gotten gains but also any benefits accruing to third parties that still could be traced to their wrongdoing. Additionally, disgorgement is sometimes ordered "without consideration of a defendant's expenses that reduced the amount of illegal profit," which would go beyond restoring the status quo and leave a defendant worse off than before.12 Although the Supreme Court ultimately did not disagree that disgorgement may serve a compensatory purpose as well, it placed heavy emphasis on disgorgement as a deterrent sanction—one whose punitive character places it well within the ambit of § 2462.

Implications of the Supreme Court's Opinion

Kokesh will have direct and immediate implications for respondents and defendants negotiating settlements with or litigating against the SEC and the US Department of Justice (DOJ). In the past, both the SEC and DOJ have regularly sought disgorgement without limitation—extending back to the first date of any alleged misconduct and without any credit for taxes paid or for many other types of business expenses—rendering the disgorgement calculation disconnected from corporate defendants' business realities.

Going forward, respondents and defendants are well-positioned to argue that any disgorgement sought must extend no further than five years from the date a claim accrued, assuming there are not facts strongly suggesting an ongoing scheme that can be tied to an earlier date. It remains to be seen whether respondents and defendants that have recently executed settlement agreements with the SEC will be successful in renegotiating those agreements on the grounds that the law has now been clarified. Further, the SEC and DOJ may look to accelerate existing investigations and cases based on potential amounts of disgorgement, timing, and fact patterns of misconduct.

The SEC can be expected to try to end-run the Kokesh decision by arguing fraudulent concealment of the conduct at issue or that the wrongdoing represented a "continuing course of conduct" that began before, but continued into, the five-year limitation period. Accordingly, as part of their defensive strategies, respondents and defendants should consider how best to demonstrate distinct patterns of conduct to counter the argument that individual acts or violations were part of an inter-related, ongoing scheme. In addition, for in-house compliance and legal teams, the Supreme Court's ruling further incentivizes robust policing of internal policies and procedures so that any identified wrongdoing can be definitively halted.   

The Supreme Court's evident skepticism about the remedial nature of prior disgorgement awards that were "ordered without consideration of defendant's expenses that reduced the amount of illegal profit"13 should encourage defendants to argue for greater offsets to SEC disgorgement demands. Tellingly, the Court noted that "[n]othing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context."14

In the face of Gabelli and Kokesh, the SEC must now conduct its investigations more quickly, file enforcement actions more readily, and characterize alleged fraudulent activity more frequently as part of a single continuing act, in order to minimize the effect of the statute of limitations. Whether Kokesh will lead to additional cutbacks in the scope of disgorgement remains to be seen in future cases.

Footnotes

1  28 U.S.C. § 2462.

2  SEC v. Kokesh, No. 15-2087, 834 F.3d 1158 (10th Cir. 2016).

3  See Riordan v. SEC, 627 F.3d 1230, 1234 (D.C. Cir. 2010); SEC v. Tambone, 550 F.3d 106, 148 (1st Cir. 2008).

4  No. 14-13562, 823 F.3d 1357 (11th Cir. 2016).

5  Kokesh v. SEC, No. 16-529, 2017 WL 2407471, at *7-8 (June 5, 2017).

6  Gabelli v. SEC, 568 U.S. 442, 454 (2013).

7  2017 WL 2407471, at *6.

8  Id. at *7.

9  Id. (quoting Brief for SEC at 22).

10   Id.

11  Id. at *8.

12  Id.

13  Id. at *8.

14  Id. at *5 n.3.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions