United States: Supreme Court Sharply Limits SEC's Ability To Order Disgorgement, Ruling That Five-Year Statute Of Limitations Applies

For decades, the US Securities and Exchange Commission (SEC) has wielded a powerful weapon in its ability to obtain disgorgement orders to recoup any ill-gotten gains traceable to alleged securities violations. Although SEC civil money penalties are limited by a five-year statute of limitations, no similar express limitation period applied to disgorgement. As a result, the SEC believed that it had wide latitude to, and regularly did, seek large monetary awards based on the purported profits of often decades-old conduct. On June 5, 2017, the US Supreme Court issued an historic ruling in Kokesh v. SEC1 that drastically slashes the agency's ability to impose financial sanctions by holding unanimously that disgorgement is subject to the same five-year statute of limitations that applies to civil monetary penalties.

At issue in Kokesh was the meaning of 28 USC §2462, which provides that a five-year statute of limitations exists for any "fine, penalty, or forfeiture, pecuniary or otherwise." The SEC has always taken the position that Section 2462 does not apply to disgorgement because it is an equitable remedy, not a "fine, penalty, or forfeiture," and merely seeks to deprive a defendant of unlawful profits, putting the defendant in the position he was prior to the wrongful conduct. In recent years, however, a circuit split had emerged—with the First,2 DC,3 and Tenth Circuits4 all siding with the SEC and holding that Section 2462 does not apply to claims of disgorgement, and the Eleventh Circuit5 finding that disgorgement constitutes a penalty and forfeiture under Section 2462 and is therefore subject to the five-year statute of limitations.

The Supreme Court's decision arose from the defendant's appeal of the Tenth Circuit's decision in S.E.C. v. Kokesh.6 The Defendant Charles Kokesh owned and controlled SEC-registered investment-adviser firms that operated registered business-development companies. According to the SEC, between 1995 through 2009, Kokesh misappropriated more than $34.9 million from the business-development companies. The SEC brought a civil enforcement action in 2009, seeking disgorgement of all profits going back as far as 1995, from Kokesh's conduct. After the jury found that Kokesh had violated the securities laws, the trial court ordered him to pay a civil money penalty in the amount of approximately $2.35 million and to disgorge $34.9 million in profits—the vast majority of which were generated outside the five-year limitations period of Section 2462—specifically ruling that the statute of limitations did not apply to limit disgorgement. On appeal, the Tenth Circuit affirmed the trial court and reiterated that disgorgement was neither a penalty nor a forfeiture, and therefore was not subject to Section 2462's limitation.

The Supreme Court disagreed sharply—holding that disgorgement constitutes a penalty, i.e., a "punishment, whether corporeal or pecuniary, imposed and enforced by the State, for a crime or offen[s]e against is laws."7 The Court explained that a remedy is a penalty when it redresses a "wrong to the public,"8 rather than an individual, and is intended to punish and deter offenders rather than compensate victims. The Supreme Court held that disgorgement satisfies both conditions. First, the remedy is sought for violations against the United States, rather than an individual, which is why an SEC enforcement action proceeds when the victims are not parties to it and, in fact, may not even support the prosecution. Second, the Court reasoned that disgorgement is imposed for punitive, rather than compensatory, purposes. It specifically relied on the stated deterrent purpose of disgorgement in prior SEC enforcement actions. The Court also recognized that although some disgorged funds make their way to the purported victims, the funds are often deposited in the US Treasury.

The Court's decision has major ramifications for the SEC's enforcement program. It can no longer reach profits incurred more than five years prior to the date it brings suit, which will substantially reduce the amounts it is able to recover. The decision will have particular significance for certain types of financial fraud enforcement actions in which the SEC has historically relied heavily on disgorgement to significantly increase monetary sanctions, such as those alleging violations of the Foreign Corrupt Practices Act or multi-period false periodic filings. In these cases disgorgement is often the largest portion of the sanction. For example, disgorgement and prejudgment interest in Kokesh were more than 15 times the amount of the civil money penalty imposed. The Kokesh decision will definitely ratchet up the pressure on the enforcement staff to act quickly. Currently, complex financial fraud investigations take years to complete. The staff will no longer have that luxury if it wants to optimize the monetary sanctions it can impose.

The Supreme Court's decision has several practical applications for those who find themselves the focus of an SEC investigation or become aware of conduct that could lead to an investigation. First, it increases the importance of conducting an early and thorough initial assessment of the conduct and potential liability. Understanding what conduct falls within the actionable time period is crucial when considering whether to self-report.  While self-reporting and subsequent cooperation can result in reduced charges and smaller sanctions, if minimal conduct falls within the actionable period, or the period is about to run, the risk/benefit analysis changes significantly.  Such an assessment is also important when deciding whether to enter into a tolling agreement with the SEC, a routine request by the staff. It may well be in a potential defendant's interest to forgo such agreements, taking advantage of the shortened period and maintaining the pressure on the SEC. Existing investigations should also get a hard look. In some instances potential liability may be significantly curtailed because of the Kokesh ruling. Historical conduct may no longer be actionable and, as a result, the litigation and settlement posture of the investigation may be significantly different.

The Kokesh decision seems to signal a developing trend among courts of greater willingness to rein in law enforcement authorities when they stretch their statutory authority. Korkesh is only the most recent case to suggest that courts will no longer rubber stamp the discretion of enforcement authorities. Just last year the Supreme Court decided McDonnell v. United States,9 wherein it refused to adopt a broad interpretation of the federal bribery statute because of general skepticism in trusting prosecutorial or government discretion to interpret the statute. Likewise, in Gabelli v. S.E.C.,10 the Supreme Court declined to apply the discovery rule when determining when the limitations period for civil money penalties begins to run under Section 2462 —a position espoused by the SEC. Instead, the Court ruled unanimously that the period starts on the date of the occurrence of a violation, noting that the SEC is in a different position from an ordinary person.  It is seeking to punish rather than obtain compensation, and has many tools at its disposal to root out bad conduct. Again, the Court expressed skepticism that an enforcement authority would properly use a discovery rule against wrongdoers.

For more information concerning this alert or other recent developments regarding Kokesh v. SEC, please contact Dentons using the information provided in the upper right under "Key Contacts."


1 No. 16-529, 2017 WL 2407471 (U.S. June 5, 2017).

2 S.E.C. v. Tambone, 550 F.3d 106 (1st Cir. 2008).

3 Riordan v. S.E.C., 627 F.3d 1230 (D.C. Cir. 2010).

4 S.E.C. v. Kokesh, 834 F.3d 1158 (10th Cir. 2016).

5 S.E.C. v. Graham, 823 F.3d 1357 (11th Cir. 2016).

6 834 F.3d 1158 (10th Cir. 2016).

7 Kokesh, 2017 WL 2407471, at *5.

8 Id.

9 136 S. Ct. 2355 (2016).

10 133 S. Ct. 1216 (2013).

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