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Marc Alain Bohn: After Kokesh, new pressure on SEC to settle faster

The U.S. Supreme Court issued its highly anticipated opinion in Kokesh v. SEC Monday, unanimously holding that the SEC’s use of disgorgement operates as a penalty under federal law and is therefore not freed from the five-year statute of limitations.

The decision represents a significant defeat for the SEC, which has long characterized disgorgement as an equitable remedy rather than a penalty or forfeiture subject to the five-year statute of limitations established by 28 U.S.C. § 2462, the U.S. Code’s general statute of limitations governing civil enforcement.

The case expands upon the Supreme Court’s landmark 2013 holding in Gabelli v. SEC, which found that monetary penalties are subject to §2462’s five-year statute of limitations on any “civil fine, penalty, or forfeiture, pecuniary or otherwise,” without addressing whether this time limit extended to equitable relief such as disgorgement.

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The SEC’s action against Charles Kokesh, a New Mexico investment advisor, alleged that from 1996 to 2009 he used two investment adviser firms he owned to misappropriate nearly $35 million in publicly offered funds from several investment companies. 

Following his conviction, the district court ordered Kokesh to disgorge $34.9 million, plus $18.1 million in pre-judgment interest (along with a $2.4 million penalty related to conduct occurring after 2004). In its judgment, the court concluded that §2462’s five-year statute of limitations did not apply to the disgorgement judgment because disgorgement is not a “penalty” within the meaning of the statute.

Kokesh appealed, arguing, among other things, that the disgorgement should qualify as a penalty or forfeiture under §2462 and therefore must be set aside because the claims accrued more than five years before the SEC brought its action and were therefore time-barred. In support Kokesh cited the 11th Circuit’s May 2016 decision in SEC v Graham, which held that §2462 applied to disgorgement.

In reaching its opinion, the 11th Circuit had sidestepped the question of whether disgorgement constituted equitable relief and decided the matter on the statutory construction of §2462 instead, reasoning that disgorgement falls within the definition of “forfeiture” based on the ordinary meaning of the terms.

On August 23, 2016, the 10th Circuit rejected Kokesh’s appeal, holding that the disgorgement was not subject to §2462 because there was “nothing punitive” about requiring Kokesh to disgorge misappropriated funds and, in the court’s view, disgorgement was not akin to forfeiture. In support of its decision, the 10th Circuit cited to a string of precedent characterizing disgorgement as an equitable remedy, while relying on Black’s Law Dictionary to distinguish “forfeiture” as the punitive taking of property that facilitated a crime.

In January, the Supreme Court granted Kokesh certiorari on the question of whether §2462 applies to claims for disgorgement imposed as a sanction for violating a federal securities law.

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Monday the Supreme Court sided with Kokesh, unanimously holding SEC disgorgement to be a penalty subject to the five-year statute of limitations established by §2462.

In determining whether SEC disgorgement qualified as a penalty, Justice Sotomayor’s opinion cited two governing principles: (1) whether the sanction is redressing a public wrong or a private wrong to an individual; and (2) whether the sanction’s purpose is to punish the wrongdoer and deter others from engaging in similar misconduct or to compensate victims.

The Court held that the application of these principles “readily demonstrates” that SEC disgorgement qualifies as a penalty within the meaning of §2462. Specifically, the Court found that SEC disgorgement is: (1) used to address the violation of public laws, meaning “violations committed against the United States rather than an aggrieved individual”; (2) imposed for punitive purposes, because sanctions intended to deter the violation of public laws are “inherently punitive”; and (3) often not compensatory, as district courts have discretion to determine how to distribute disgorged profits. 

The Court concluded: “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.”

The Court also rejected the SEC’s claim that disgorgement is not punitive but “remedial” because itoperates to “restore the status quo.” The Court noted that because SEC disgorgement may be ordered without consideration of a defendant’s expenses, it sometimes exceeds the profits gained as a result of the violation. The Court characterized this as punitive because it leaves the defendantworse off than he otherwise would have been.

*     *     *

The most immediate consequence of the Court’s decision will be to constrain the SEC’s ability to disgorge illicit gains realized outside of the five-year statute of limitations by defendants who are currently under investigation. However, since the SEC generally solicits tolling agreements from cooperating defendants that toll the statute of limitations, the impact here will be more muted than one might otherwise expect.

Nonetheless, going forward defendants might be less willing to enter into such agreements or will seek to narrowly tailor them in ways that were less critical prior toKokesh.

The real significance of Kokesh will be in the leverage that it provides to defendants under investigation. When one considers that the lion’s share of monetary obligations imposed by the SEC in recent years via judgments, orders and settlements has been characterized as disgorgement, it is clear that the SEC’s ability to reach conduct outside the statute of limitations has served as a tremendous cudgel for the Commission. Defendants negotiating positions on liability and financial sanctions have been undermined by the SEC’s ability to threaten massive disgorgement payments.  

Kokesh levels this playing field: everyone is going to have to focus on conduct and sanctions within the statute of limitations.   

The Court’s decision will also put pressure on the SEC to resolve investigations more quickly as a means of minimizing statute of limitations issues, and is likely to influence the SEC’s overall enforcement strategy going forward, including what cases the Commission ultimately deems worth pursuing.


Marc Alain Bohn is a contributing editor of the FCPA Blog and an editor of Miller & Chevalier’s FCPA Winter Review 2017.

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