On June 5, 2017, the United States Supreme Court held that the five-year statute of limitations which applies to SEC claims for civil penalties (28 U.S.C. § 2462) also applies to SEC claims for disgorgement. The decision is a major setback for the SEC and could potentially expedite or otherwise alter the SEC’s enforcement decisions with respect to cases where it might seek disgorgement as a remedy.
BACKGROUND
Section 2462 provides that “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued.” In 2013, the Supreme Court took up the meaning and application of the statute in Gabelli v. SEC, holding that the statute of limitations in Section 2462 begins to accrue the moment a violation occurs. 133 S. Ct. 1216 (2013). The Court left open the issue of whether the SEC’s claim for disgorgement was subject to Section 2462. Federal appeals courts considering the issue reached divergent conclusions. Compare SEC v. Kokesh, 834 F.3d 1158 (10th Cir. 2016) (concluding Section 2462 does not apply to disgorgement); Zacharias v. SEC, 569 F.3d 458, 471-72 (D.C. Cir. 2009) (same); SEC v. Tambone, 550 F.3d 106, 148 (1st Cir. 2008) (same), vacated, 537 F.3d 54 (1st Cir. 2009), opinion reinstated, 597 F.3d 436 (1st Cir. 2010), with SEC v. Graham, 823 F. 3d 1357, 1363 (11th Cir. 2016) (concluding Section 2462 does apply to disgorgement).
KOKESH V. SEC
In Kokesh v. SEC, the Supreme Court finally resolved the issue left open in Gabelli, concluding that Section 2462’s five-year statute of limitations applied to disgorgement. In Kokesh, the SEC brought a 2009 lawsuit against Charles Kokesh, alleging that from 1995 to 2009 Kokesh misappropriated $34.9 million from four business development companies that used his investment adviser firms for investment advice. The SEC sought civil monetary penalties, disgorgement, and an injunction barring Kokesh from future violations of securities laws. After a jury found Kokesh guilty of securities laws violations, the District Court concluded, among other things, that Section 2462 did not bar disgorgement for any misappropriation occurring more than five years before the SEC brought suit. The District Court then imposed the full disgorgement amount of $34.9 million–$29.9 million of the $34.9 million occurred more than five years prior to the SEC’s lawsuit-including prejudgment interest of $18.1 million. The Tenth Circuit affirmed, concluding that disgorgement was neither a penalty nor a forfeiture.
Wasting no time, the Supreme Court reversed the Tenth Circuit in the first paragraph of its decision, concluding that disgorgement is a penalty “within the meaning of § 2462 and so disgorgement actions must be commenced within five years of the date the claim accrues.” Slip Op. at 1. After providing a history of how the Court had construed the term “penalty” over its history, including the antecedent to Section 2462, the Court offered three reasons why disgorgement was a penalty. First, disgorgement is imposed for violating “public laws,” i.e., laws designed to protect the public interest. Id. at 7. Second, disgorgement is punitive in that the main purpose of disgorgement is the deterrence of future securities laws violations by depriving violators of their “ill-gotten gains.” Id. at 8 (citation omitted). And finally, disgorgement is not compensatory because disgorged funds are paid to a district court and although most of it goes to victims, “it is within the court’s discretion to determine how and to whom the money will be distributed.” Id. at 8-9 (citation omitted). Thus, SEC disgorgement “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,” and “[t]he 5-year statute of limitations in §2462 therefore applies” to it. Id. at 9.
CONCLUSION
Beyond a dramatic reduction in Kokesh’s disgorgement amount, the decision represents a significant win for persons from which the SEC seeks disgorgement, and could result in the Commission tailoring the relief it seeks in currently-filed civil suits. On the other hand, the Commission may expedite currently pending investigations, pursue additional tolling agreements, or rush to court based on scant evidence in order to eliminate the application of Section 2462. We will continue to monitor this area of developing law.
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If you have any questions regarding the matters covered in this e-mail, please contact Jack Yoskowitz or your primary attorney in in Seward & Kissel’s Capital Markets, Investment Management, or Litigation Groups.
